March 28, 2023

OSFI Guideline B-15 Climate Risk Management now in force

The Office of the Superintendent of Financial Services (OSFI) issued its final Guideline B-15 Climate Risk Management in March 2023. It applies to all federally regulated financial institutions (FRFI), including more than 350 banks and insurance companies. OSFI reports that climate change has the potential to significantly impact the safety and soundness of FRFI and Canada’s financial system more broadly. The guideline specifies that building resilience against climate-related risks requires banks and insurers to address vulnerabilities in their business model, overall operations, and their balance sheet, including continuously monitoring and prudently managing climate-related risks to remain financially and operationally resilient. The FRFI is to identify, manage, and mitigate the impact of climate-related risks on the FRFI’s short-term and long-term strategic, capital, and financial plans, integrating them into its Risk Appetite Framework and Enterprise Risk Management framework. Each FRFI must have processes and controls to measure the current and potential future impact of climate-related risks on its portfolio of exposures over short, medium and longer term.

Guideline B-15 requires each FRFI to develop and implement a Climate Transition Plan to manage increasing climate-related physical and transition risks and the transition towards a low greenhouse gas economy. Each bank and insurance company is to assess the achievability of its plan under different climate-related scenarios and how it measures its progress against internal emissions metrics and targets.

Each FRFI is to maintain sufficient capital and liquidity buffers, incorporating climate-related risks into its Internal Capital Adequacy Assessment Process (ICAAP) or Own Risk and Solvency Assessment (ORSA) process. It should incorporate the impact of climate-related drivers on its liquidity risk profile and integrate a range of entity-specific and market-wide severe, yet plausible, climate-related stress events when assessing the adequacy of its liquidity buffers. Guideline B-15 specifies that the FRFI should have the appropriate governance and accountability structure in place to manage climate-related risks, and consider how senior management compensation practices should incorporate climate-related risk considerations.

The six largest banks, called Domestic Systemically Important Banks (D-SIB), and internationally active insurance groups headquartered in Canada must start reporting by fiscal year-end 2024, making their climate-related financial disclosures publicly available no later than 180 days after fiscal year-end. All other federally banks and insurers must report no later than one year later. All FRFI must report governance, strategy, risk management, and targets and metrics, OSFI aligning its requirements with the Taskforce on Climate-related Financial Disclosures (TCFD) framework and the proposed International Sustainability Standards Board (ISSB) standards.

The FRFI should provide information on current and potential future impact of climate-related risks and opportunities on its markets, businesses, investment strategy, financial statements, and future cash flows. The disclosure is to be clear, balanced, understandable, and verifiable financial information that serves the needs of a range of users. The disclosures are not subject to independent external assurance at this time, but OSFI advises that FRFI should expect external assurance requirements in the future. The FRFI should disclose consistently over time to enable users to understand the impact of climate-related risks on the FRFI’s business and to allow for meaningful inter-period comparisons.