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What OSFI’s Draft Climate Risk Guideline Means for Canadian Financial Institutions

July 26, 2022

On May 26, Canada’s federal financial regulator released a draft guideline that outlines how nationally regulated financial firms should both manage and disclose their climate risks.

As part of the draft guideline, the Office of the Superintendent of Financial Institutions (OSFI) lays out six climate governance and risk management principles, as well as six climate-related disclosure principles for federally regulated financial institutions (FRFIs). 

Many Canadian financial firms will have to familiarize themselves with this guideline and take steps to implement its principles. In this blog, we draw on a recent webinar that Manifest Climate hosted with financial services firm Vancity and advocacy organization Environmental Defence Canada. The conversation explored the OSFI’s draft guideline and how businesses can prepare.

OSFI’s draft climate risk guideline

The TCFD’s first pillar is governance, which includes recommendations for top-down climate-related management from companies’ board members and senior leaders. This is where businesses should begin their TCFD journeys. If companies want to implement and disclose their climate-related governance processes successfully, they will need broad buy-in from their senior leadership. Employees should think about how to approach senior leaders to discuss reporting in line with the TCFD.

Among the climate governance and risk management principles, OSFI says FRFIs should:

  1. Consider physical and transition climate-related risks in their business models and strategies; 
  2. Implement climate-related governance policies and practices;
  3. Implement processes that both price and manage firms’ climate risk-sensitive assets and liabilities; 
  4. Mitigate the effects of climate disasters on their operations;
  5. Use climate scenario analysis to assess their climate risks; and
  6. Keep adequate capital and liquidity buffers to deal with climate-related risks as they materialize

When it comes to climate-related financial disclosures, OSFI says they should be:

  1. Relevant; 
  2. Specific and complete; 
  3. Clear, balanced, and understandable; 
  4. Reliable, verifiable, and objective;
  5. Appropriate for their size, nature, and complexity; and 
  6. Consistent over time

The OSFI draft guideline’s significance

As climate change continues to accelerate, it’s become more and more apparent that delaying climate action increases physical and transition climate risks. This has implications for both the economy and overall financial stability. 

Globally, trillions of dollars are at risk of being lost from ‘stranded assets’ — carbon-intensive investments that stand to fall sharply in value as the shift to a green economy progresses. By including principles for climate disclosures in its draft guideline, OSFI is instructing financial firms to both report their emissions and climate transition plans, which should help them to avoid or limit stranded asset risks. Moreover, the timely release of OSFI’s draft guidance will help companies prepare for and get ahead of the climate transformation.

OSFI’s draft guideline also brings a baseline of consistency to climate reporting among Canadian financial firms. Many FRFIs are using different climate scenario analyses and metrics from one another. OSFI’s new guidance lays the groundwork for a more standardized approach to tackling climate governance, risk management, and disclosures.

OSFI, the TCFD, and other climate disclosure frameworks

OSFI’s draft guideline would require all FRFIs to report their climate information in line with the 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the globally recognized climate reporting framework. This means they will have to report details on their operational and financed emissions, as well as the results of any in-house climate scenario analyses.

OSFI’s disclosure expectations are also explicitly linked to the draft climate- and sustainability-related disclosure standards that were recently released by the International Sustainability Standards Board (ISSB), an entity founded by the International Financial Reporting Standards Foundation. The draft guideline also shares similarities with the recently released transition plan framework out of the Glasgow Financial Alliance for Net Zero (GFANZ), the world’s largest climate finance alliance. However, GFANZ goes above and beyond OSFI’s guidelines by requiring more from companies, including the decommissioning of high-emitting assets.

Gaps in OSFI’s draft guideline

While OSFI’s draft guideline aligns closely with other climate risk management standards and disclosure rules, it still has some gaps. For example, OSFI’s disclosure principles do not cover ‘double materiality.’ This means FRFIs do not have to report how their actions impact the climate — only how climate impacts could affect their businesses. This omission means stakeholders will only get a partial view of the relationship between the Canadian financial sector and the environment.

Another gap in the current OSFI guidance concerns transition plans. While FRFIs are instructed to develop and implement transition plans, the guideline does not specify that these plans have to align with a 1.5°C warming trajectory. This failure means banks, insurers, and other financial firms would be allowed to develop plans that could lock in a higher degree of warming, which would increase the intensity and frequency of climate-related risks.

FRFIs are also given a lot of freedom to interpret OSFI’s draft guideline, which creates the possibility for reporting inconsistencies across firms. For example, firms can disclose their climate information in their shareholder reports or in stand-alone documents, like environmental, social, and governance reports. This may make it harder for stakeholders to locate the relevant climate information for firms and to fully understand how climate factors impact their financial performance. To ensure climate disclosures are consistent and comparable, OSFI should require all companies to include their climate disclosures in their periodic financial reports.

Moreover, OSFI’s current guideline doesn’t require FRFIs’ climate disclosures to be audited or independently verified — something that should happen to ensure firms are reporting legitimate information. The disclosure timelines that OSFI has laid out are also generous, with companies not being required to talk about the capital or liquidity implications of climate risk until 2025.

How can businesses prepare?

There are many Canadian and international companies that are already disclosing their climate-related information in line with the TCFD. Business leaders can connect with these companies to learn about best practices, mistakes that have been made, and what resources they need.

FRFIs can also connect with global insurers and reinsurers that have already developed sophisticated scenario analyses due to their overwhelming exposure to climate risks. These frameworks can help FRFIs lay the groundwork for their own climate governance and risk management practices, as well as disclosures. 

Firms that fall under the draft guideline should engage and collaborate with OSFI by asking for strong climate guidance and scenario analyses that will benefit them in the short, medium, and long term.

Lastly, FRFIs should explore getting external support from companies that can identify, assess, and manage corporate climate-related risks and opportunities. This is where Manifest Climate can help. Our Climate Risk Planning platform combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale. We can produce results for your business quickly and effectively. The same work that previously took climate experts days and weeks to accomplish can now be done in much less time with our software. Request a demo to learn more.