Actuarial Notes

Climate Risk Management

By Office of the Superintendent of Financial Institutions · 2023 · B-15

Study guide: Exam 6C

OSFI Guideline B-15 establishes OSFI's expectations for federally regulated financial institutions' management and disclosure of climate-related risks. It treats those risks as physical and transition risks that can drive credit, market, insurance and liquidity risks and lead to strategic, operational and reputational risks, and aims to support institutions in building resilience to them; it applies to all FRFIs except foreign bank branches. OSFI first published it in March 2023 and describes its updates of March 2024 and 2025 as changes to the disclosure expectations in Annex 2-2.

On the syllabus

  • Exam 6C — objectives C4 and C5; the whole guideline, as published in March 2023.

A Overview

  • Climate-related risks are broadly categorized as physical risks (acute extremes and events, chronic gradual shifts, and indirect effects such as public health) and transition risks (from the adjustment towards a low-greenhouse gas economy); both can also lead to liability risks.
  • They can drive credit, market, insurance and liquidity risks and lead to strategic, operational and reputational risks; in severe instances they can threaten the long-term viability of an FRFI's business model.
  • A1 Purpose and scope
    • There is no one-size-fits-all approach, since risks vary with the FRFI's size, nature, scope, complexity and risk profile; the guideline is read and implemented from a risk-based perspective.
  • A2 Structure of the Guideline
    • The chapters are interrelated and mutually reinforcing: disclosure (Chapter 2) incentivizes better governance and risk management (Chapter 1).
  • A3 Outcomes
    • The FRFI understands and mitigates the potential impacts of climate-related risks on its business model and strategy; has appropriate governance and risk management practices to manage them; and remains financially resilient through severe, yet plausible, climate risk scenarios and operationally resilient through disruption due to climate-related disasters.

1 Governance and risk management expectations

  • I Governance
    • Principle 1: The FRFI should have the appropriate governance and accountability structure in place to manage climate-related risks.
      • Senior Management has overall accountability for climate risk management; OSFI's Corporate Governance Guideline sets its expectations of the Board.
    • Principle 2: The FRFI should incorporate the implications of physical risks from climate change and the risks associated with the transition to a low-greenhouse gas (GHG) economy to the FRFI in its business model and strategy.
      • The FRFI should develop and implement a Climate Transition Plan and assess its achievability under different climate-related scenarios.
  • II Risk management
    • Principle 3: The FRFI should manage and mitigate climate-related risks in accordance with the FRFI's Risk Appetite Framework.
    • A Risk identification, measurement, and management
      • Climate-related risks are integrated into the Risk Appetite Framework and the enterprise risk management framework, with processes to measure their impact on credit, market, operational, insurance and liquidity exposures over appropriate time horizons.
      • Where data gaps exist, the FRFI should consider alternative data sources or reasonable proxies, and it should understand the data, methodology and assumptions of any third-party models it uses.
    • B Risk monitoring and reporting
      • The FRFI should be able to aggregate its climate risk data to report internally on climate-related exposures, including risk concentrations by geography, sector, product or counterparty.
  • III Climate scenario analysis and stress testing
    • Principle 4: The FRFI should use climate scenario analysis to assess the impact of climate-related risks on its risk profile, business strategy, and business model.
      • Scenarios should cover physical and transition risks and their interplay, over short-, medium- and long-term horizons; FRFIs will also complete standardized climate scenario exercises and report the results to OSFI.
  • IV Capital and liquidity adequacy
    • Principle 5: The FRFI should maintain sufficient capital and liquidity buffers for its climate-related risks.
      • The FRFI should incorporate climate-related risks into its ICAAP or ORSA process, and severe, yet plausible, climate-related stress events into its assessment of liquidity buffers.

2 Climate-related financial disclosures

  • I Purpose of disclosure expectations
  • II Scope of application
  • III Principles for effective disclosure of climate-related risks
    • Principle 1: The FRFI should disclose relevant information.
    • Principle 2: The FRFI should disclose specific and comprehensive information.
    • Principle 3: The FRFI should disclose clear, balanced, and understandable information.
    • Principle 4: The FRFI should disclose reliable and verifiable information.
    • Principle 5: The FRFI should disclose information appropriate for its size, nature, and complexity.
    • Principle 6: The FRFI should disclose information consistently over time.
  • IV Implementation date and comparative period disclosure
  • V Location and timing of disclosures
  • VI OSFI's Financial Data websites
  • VII Frequency of disclosure
  • VIII Disclosure format

Annex 1-1 Other OSFI guidance

  • Lists guidance the guideline complements, among them the Corporate Governance Guideline, Guideline E-18 Stress Testing and Guideline E-19 Own Risk and Solvency Assessment.

Annex 1-2 Examples of climate-related transmission channels

  • Pairs a physical risk (increased frequency and severity of weather events) and a transition risk (increased regulation of GHG-intensive industries) with their credit, market, insurance, operational, liquidity and liability impacts — for insurance risk, claims that consistently exceed expectations, raising insurance losses and the cost to reinsure.

Annex 2-1 Greenhouse gas emissions accounting

Annex 2-2 Climate-related financial disclosure expectations

Related readings

  • OSFI Corporate Governance — the guideline Principle 1 refers to for the Board's role, listed in Annex 1-1
  • OSFI Stress Testing — Guideline E-18, listed in Annex 1-1
  • OSFI ORSA — Guideline E-19, listed in Annex 1-1; Principle 5 brings climate-related risks into the ORSA process

Sources