Unfortunately, we’ve all been impacted one way or another by the unpredictability brought on by climate change. From wildfires to flooding to cold waves (and snow) in unusual locations, climate change is creating risks that weren’t previously a concern for businesses.
These additional levels of risk have led to the Office of the Superintendent of Financial Institutions (OSFI) to introduce new guidelines that require financial institutions to incorporate climate-related risks into their stress testing frameworks. Guideline B-15 provides a comprehensive framework for financial institutions to identify, understand, manage, and measure climate-related risks
In order to meet the OSFI B-15 requirements, financial institutions are required to:
- Integrate climate risk considerations within their governance structure.
- Integrate climate-related risks into existing risk management frameworks.
- Provide increased transparency through the disclosing of climate-related financial information.
- Perform a climate scenario analysis to understand how climate-related risks impact their risk profile, strategy, and business model.
Climate stress testing will need to address both physical (i.e. flooding, wildfire, hurricanes, and droughts) and transition risks (i.e. production, operational, investment, and financial impacts including borrowing costs).
OSFI’s development of a standardized climate scenario exercise aimed at making sure risk assessments are consistent and comparable across Canadian financial institutions has three main objectives:
- To raise awareness and strategic orientation.
- To build capacity for climate risk assessment.
- To establish standardized quantitative assessment.
While compliance doesn’t happen overnight, financial institutions must be proactive in their efforts to understand and comply with OSFI B15 requirements. Financial institutions should already be developing stress testing frameworks and participating in standardized climate scenario exercises. Year after year it is clear that climate change is having a growing impact on the world and it will be important to stay on top of what is an ever-evolving risk.
We’re already helping several clients across the financial sector navigate these requirements, so if there’s anything we can do to help you, please reach out.
Steve Monk
Founder and CEO
Steve@ceolawcanada.com