April 24, 2024

Strengthening climate resilience in the financial services sector: A summary of our conversation with Québec’s AMF on its Climate Risk Management Guideline

On April 24, 2024, the Canadian Climate Law Initiative (CCLI), in collaboration with Governance Professionals of Canada, hosted a webinar to speak with the Autorité des marchés financiers (AMF) about its guideline on climate change risk management. During a panel moderated by Flavie Desgagné-Éthier, Climate Change Program Director at the Trottier Family Foundation, participants gave a brief overview of the guideline, its implications for regulated financial institutions in Québec, and its importance in Québec, in Canada and internationally in terms of sustainable finance regulation.

Julien Reid, Senior Director of Supervision and Resolution at the AMF, began with an overview of the guideline and how it fits in with the AMF’s mission as a prudential regulator. He began by mentioning that the final guideline would be aligned with Guideline B-15 of the Office of the Superintendent of Financial Institutions (OSFI). Julien mentioned that many financial institutions in Québec are already considering climate, but that more explicit expectations are needed. Julien pointed out that a guideline is not prescriptive, and allows the concept of proportionality to be applied according to the type of institution. Climate change is an important issue for the influential regulator of Québec’s financial sector.

In 2022, the AMF published a report on the risks associated with climate change following a survey of about 100 financial institutions including licensed insurers, financial services cooperatives, authorized trust companies, and other authorized deposit institutions. In parallel, it has been working with the Canadian Council of Insurance Regulators on the fair treatment of consumers. The AMF’s guideline on climate change risk management is part of that work, and part of efforts to align with OSFI.

Sonia li Trottier, Director of the Canada Climate Law Initiative, then discussed how the guideline fits into the prudential regulatory landscape in Canada and internationally. The AMF is the first regulator of financial institutions in Canada to publish a guideline on climate-related financial risk management. In British Columbia, the BC Financial Services Authority, which regulates the financial services sector, held a consultation on natural and climate-related risks from July to November 2023, but no draft has yet been published, demonstrating Québec’s leadership.

Sonia li welcomed Julien’s news that the guideline would be aligned with the Office of the Superintendent of Financial Institutions’ (OSFI) B-15 guideline, improving harmonization between regulators at provincial, federal and international levels since OSFI updated B-15 with IFRS S2 standards last March. More specifically, CCLI had recommended that the AMF guideline recognize climate risk as a transversal risk, and include mandatory disclosure of scope 3 greenhouse gas (GHG) emissions, which often make up the lion’s share of financial institutions’ emissions. She mentioned that the objective of including this mandatory disclosure is to build the capacity of financial institutions and to have a better understanding of the financial institution’s climate risk exposure in its value chain and financed emissions.

At the international level, Sonia li mentioned the importance of aligning disclosure requirements with the IFRS S2 international standards.

Sonia li concluded her remarks by highlighting the important role of financial institutions in the transition to a net-zero economy, through their investments, as well as through their engagements with portfolio companies. She highlighted a stark example of climate-related financial risk in the insurance sector: State Farm stopped providing insurance policies to new homeowners in California due to the growing risk of forest fires.

Marie-Annick Bonneau, Senior Vice-President, Investor Relations, Capital Management, Sustainability and Public Affairs at iA Financial Group, shared her perspective of the insurance industry, including the Group’s journey in integrating climate risks. iA Financial Group has made tremendous progress when it comes to managing climate risks and opportunities. In 2019, iA Financial Group signed the Principles for Responsible Investment of the United Nations to integrate responsible investment principles. Investors have high expectations in terms of extra-financial disclosure, and it has been three years since iA published a report aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), providing relevant and useful information for investors. They have since greatly improved their governance and risk management processes. They also hold annual training sessions for their directors and report quarterly on material risks to their business. Marie-Annick mentioned that although the first TCFD report takes time, it empowers holistic thinking about how climate risks affect the organization’s strategy, business model, investments, operations and all other verticals.

Marie-Annick mentioned that the AMF guideline is welcomed because it allows organizations to think about governance and provides better guidance and structure so that disclosures are not just a marketing exercise. It also provides better information for investors and helps internal decision-makers to have fewer blind spots and make better decisions. For example, in preparation for the AMF guideline, iA published a specific climate-related policy rather than integrating it into their sustainability policy.

Karine Péloffy, Sustainable Finance Project Lead at Ecojustice, elaborated on the importance of including scenario analysis that is aligned with 1.5°C as increasingly studies state the inadequacy of models for determining the extent of climate impacts and risks. Ecojustice proposes an approach proposed in Senator Rosa Galvez‘s S-243, An Act to enact the Climate-Aligned Finance Act and to make related amendments to other Acts, which requires the conduct of a climate scenario analysis aligned with 1.5°C, the only scenario that counts to guarantee more than a 50/50 chance of maintaining the climate without exceeding or minimally exceeding the 1.5°C target. Karine mentioned that an increasingly number of actuaries are stating that the risks are much higher than previously thought if the climate goes beyond 1.5°C. She mentioned the need to move away from fossil fuels since 80% of the emissions responsible for global warming are linked to fossil fuels. It is therefore important to consider how financial regulation could help stop the facilitation of this industry through investment. Karine, a lawyer by training, concluded by mentioning the growing risk of climate-related litigation.

The panelists then discussed other regulatory considerations. Julien mentioned that the AMF is closely following the CSSB’s work to adapt their guidelines. Marie-Annick also shared the development of legislation concerning an amendment to the Competition Act at the federal level to facilitate business collaboration on environmental risks. “We can’t do it alone,” she stated.

Finally, the panelists discussed the impact of disclosure regulations on small and medium-sized enterprises (SMEs). Sonia li spoke of the snowball effect of regulations affecting financial institutions for their portfolio companies and lenders, and the importance of not waiting for standards and requirements to be finalized before starting to address these issues, as they are constantly evolving. Just look at what’s happening in Europe, where SMEs are required to disclose climate-related financial information – regardless of potentially having less capacity and resources. Karine shared an alternative framework where SMEs could simply ask themselves questions such as, “Does the organization use fossil fuels? Does the organization engage with fossil fuel companies,” rather than attempting to measure their greenhouse gas emissions (a more difficult exercise). Marie-Annick concluded by saying that although it has taken iA Groupe financier some time to do its first TCFD report, this should not discourage SMEs. The exercise, including the reflection, would be simpler for a small- or medium-sized business, than for a large corporation.

Watch the webinar (in French):