On December 11, 2020, the Global Risk Institute (GRI) hosted Superintendent Jeremy Rudin, of the Office of the Superintendent of Financial Institutions (OSFI), for a discussion on climate change and the risks it poses to the Canadian financial system. Sonia Baxendale, President and CEO of GRI, hosted the webinar.

Superintendent Rudin drew on lessons from the ongoing public health and economic crisis to inform the path forward on climate risk. The pandemic illustrates how external shocks manifest in the financial sector and demonstrates how challenging risks can be to manage when there is little past experience to draw from. In both of these respects, COVID-19 has proved a source of significant uncertainty, much like a changing global climate. Climate change not only creates physical and liability risks to Canadian financial institutions, but also imposes transition risks, linked to the shift away from a carbon-intensive economy.

As a way to cope with the uncertainties of climate risk, a new pilot project on climate scenarios is underway jointly with the Bank of Canada (BoC), and six banks and insurance companies. OSFI and the BoC will develop a set of Canada-specific climate scenarios and methods that the participating financial institutions will apply in order to evaluate the risks to their balance sheets. The project will conclude with a final report to be released in late 2021.

The Superintendent announced a discussion paper, to be published in January 2021, designed to engage their regulated institutions and other stakeholders about whether or not the existing principles-based guidance and supervisory practices go far enough in addressing climate risks to the financial system. Key questions will cover how climate-related risks can affect the safety and soundness of financial institutions, and the role that OSFI can and should play to facilitate their preparedness and resilience to these risks.

It was noted that other regulators are taking action on climate risk and that a variety of different models for prudential regulation are being considered. Superintendent Rudin shared that OSFI continues to engage with partners abroad on climate change, drawing lessons and best practices as appropriate, yet emphasized that OSFI’s primary aim remains a best-for-Canada approach.

Superintendent Rudin said that capital and liquidity levels in Canadian institutions are relatively strong, and that these buffers can still cover otherwise unexpected losses, including those related to climate. OSFI will use the climate scenarios pilot project and the forthcoming consultation paper to assess whether existing prudential measures are sufficient and to identify gaps where more or better data is needed for risk assessment. The forthcoming discussion paper will help to clarify whether there is a need for stand-alone climate disclosure requirements or whether these can be treated as an adjunct to existing prudential standards.