Canada financial regulator sets out rules on climate risk disclosure

The Office of the Superintendent of Financial Institutions (OSFI) has issued new guidelines for Canada’s banks and insurers, which lay out rules for how financial institutions should approach climate risk management.

The new Guideline B-15: Climate Risk Management is OSFI’s first prudential framework that is “climate sensitive,” and recognizes the impact of climate change on managing risk in Canada’s financial system. It was developed following a months-long consultation with industry stakeholders and with public feedback. The guideline establishes OSFI’s expectations as to how federally regulated financial institutions (FRFIs) manage their climate-related risks.

Currently, the guideline is compromised of two chapters: governance and financial disclosures. OSFI hopes to review and amend the guideline as practices and standards evolve. Generally speaking, the guidance lays out principles that include stress testing FRFIs for climate-related events when assessing the adequacy of an organization’s buffers, as well as ensuring FRFIs have appropriate governance and accountability structures to manage climate-related risks.

The guideline also calls for FRFIs to collect accurate and timely data related to the “physical” (financial risks from increasing severity and frequency of climate-related extremes) and “transition” (financial risks related to the process of transitioning to a low-greenhouse gas economy) risks that are relevant to their business activities.

Notably, during the consultation period for the guideline, respondents had requested for OSFI to delay its implementation for at least a year, to allow its disclosure expectations to align with standard-setting bodies such as the International Sustainability Standards Board (ISSB) and the Canadian Sustainability Standards Board (CSSB). OSFI responded positively to this feedback.

The guideline will be effective fiscal year-end 2024 for domestic banks and internationally active insurance groups headquartered in Canada. It will become effective for other FRFIs at end of fiscal year 2025.

OSFI delaying the guideline implementation to align with international standards comes as no surprise. Last July, the agency and the Autorité des marchés financiers released finalized capital guidelines for insurance companies, in preparation for the implementation of International Financial Reporting Standards 17 (IFRS 17) this year.

Will the OSFI’s new rules help Canada’s insurers stay on track when it comes to climate risk management? Share your thoughts in the comments below.