C49 OSFI CLIMATE

Why is Climate-Related Risks important?

• Can intensify over time

• Drive financial risks

• Can threaten business model viability

2 Types of Climate-Related Risks

Physical Risk: financial risk from inc sev/freq of climate events

Transition Risk: financial risk related to transition to low GHG economy

3 Types of Physical Risks

Inc sev/freq from:

Acute → extreme weather events

Chronic → longer-term gradual shifts of climate

Indirect → public health implications, ex: morbidity & mortality

Transition Risks can emerge from

TRC

• Regulations to limit GHG emissions

• New Technologies

• Change in Customer preference

Climate risks can lead to liability risks, such as

• Climate-related claims under liability policies

• Litigation for failing to manage climate risks

OSFI’s Climate Risk Guidelines applies to

FRFI = federally regulated financial institutions

OSFI Climate Risk Mgmt → Expected Outcomes

BGR

Business Model

• Understands & mitigates climate risk impacts on Business model

Governance & Risk Mgmt

• Has appropriate Governance & risk mgmt practices for climate risks

Resilience

• Financially resilient thru severe yet plausible climate risk scenarios

• Operationally resilient thru climate disasters

Climate Risk → 5 Principles of Governance & Risk Mgmt

AI-MCM

Appropriate governance & accountability structure

• Senior Mgmt has overall accountability

Incorporate implications of physical & transition risks in business model

• Understand impact on short/long-term plans

Manage climate risks in accordance w/ Risk Appetite Framework

• Have controls to identify current/future impacts of climate risk

Climate scenario analysis to assess impact on business model

• Consider scenarios that have both physical & transition risks

Maintain sufficient capital & liquidity buffers

• Incorporate climate risks in ORSA

Climate Risk Disclosures Principles

Should disclose info that’s…

CRAC

• Clear, balanced & understandable

  • Serves needs of range of users

• Reliable & verifiable

  • High quality & unbiased

• Appropriate for its size/nature/complexity

  • Larger company = more volume/detail

• Consistently over time

  • Allow for inter-period comparisons

Physical Risk → Transmission channels

Credit Risk: damage to collateral for bank loans

• Higher capital requirements

Insurance Risk: claims higher than expected

• Higher insurance losses & cost to reinsure

Transition Risk → Transmission channels

Credit Risk: GHG-intensive borrowers face higher cost of doing business

• Higher capital requirements

Liability Risk: BoD fails to appropriately manage climate risks

• Legal action & reputation damage

Climate Scenario Analysis

ILA

• Assess Impact of climate risks on business model

• Identify Limitations in data, method, assumptions

• Test Adequacy of risk mgmt framework