On March 20, 2024, the Office of the Superintendent of Financial Institutions Canada (OSFI) revised Guideline B-15: Climate Risk Management (Guideline B-15), which sets out expectations for the sound management of climate-related risks for federally regulated financial institutions (FRFIs), and published final Climate Related Risk Returns("Returns").
As discussed in greater detail below, OSFI has revised Annex 2-2 (Minimum mandatory climate-related financial disclosure expectations) of Guideline B-15 to align it with the International Sustainability Standards Board's final IFRS S2 Climate-related Disclosures standard (IFRS S2).
The Returns were prepared in partnership with the Bank of Canada and the Canada Deposit Insurance Corporation and will be utilized to collect standardized climate-related data on emissions and exposures from FRFIs.
Guideline B-15 is effective: (i) fiscal year-end 2024, for domestic systemically important banks and internationally active insurance groups headquartered in Canada; and (ii) fiscal year-end 2025, for all other in-scope FRFIs.
For more information about Guideline B-15, please see our article here.
Annex 2-2
Annex 2-2 sets out minimum disclosure expectations for the various categories of FRFIs. Similar to IFRS S2, Annex 2-2 consists of four main categories: (i) Governance; (ii) Strategy; (iii) Risk Management; and (iv) Metrics and Target. The updates to Annex 2-2 provide more detail and precision to each of the foregoing categories and are summarized below.
(i) Governance
FRFIs will be expected to disclose information pertaining to their governance bodies, committees and individuals responsible for the oversight of climate-related risks and opportunities. Such disclosure must include details about the skills and responsibilities of such individuals, as well as a description of whether and how climate-related considerations are factored into their renumeration.
Disclosure obligations with respect to management's role have also expanded to include the identity of the management-level position or committee, its governance processes, controls, procedures and how oversight is exercised over that position or committee.
(ii) Strategy
FRFIs are expected to describe the climate-related risks and opportunities that could reasonably be expected to affect their cash flows, access to finance or cost of capital. The Strategy section also requires disclosure with respect to the impact of climate-related risks on the FRFI's business model and value chain, strategy and decision-making, financial position, financial performance and cash flows.
(iii) Risk Management
The Risk Management section has been updated to require disclosure of the FRFI's: (a) processes for identifying and assessing climate-related risks, (b) processes for identifying and assessing climate-related opportunities, and (c) how the processes for identifying and assessing climate-related risks are integrated into the FRFI's overall risk management process.
(iv) Metrics and Target
The Metrics and Target section was updated to require disclosure of inputs and assumptions the FRFI uses to measure its Scope 1 and Scope 2 greenhouse gas (GHG) emissions and location-based Scope 2 absolute gross GHG emissions. Scope 3 GHG emissions disclosure has been broadened to include more detail and sector-specific requirements. Specifically, FRFIs should consider all 15 categories of Scope 3 GHG emissions and ensure the inclusion of Category 15: Investments. For in-scope FRFIs that participate in property and casualty insurance (excluding mortgage insurance), Category 15 entails emissions from insurance and reinsurance underwriting portfolios.
The updates to Annex 2-2 are expected to streamline climate-related financial disclosures and promote transparency of climate-related risks.
Climate related risk returns
OSFI has published Returns for deposit-taking institutions and for insurers. The Returns will facilitate the collection of standardized climate-related data on emissions and exposures from FRFIs that will allow OSFI to carry out evidence-based policy development, regulation and supervision related to climate risk.
In response to feedback provided by insurers, OSFI has made the following changes to the Returns for insurers:
- The definition of "perils" is now aligned with the definitions of modeled perils from major catastrophe model vendors. The four types of perils used for the IC1 (OSFI 1002) Return are: wildfire, flood, severe convective storms and hurricanes.
- OSFI will only require reporting on Probable Maximum Losses (PML) on a national basis from both internal and third-party catastrophe models.
- The Returns include explanations of the purpose of the data collection and clarify that the reporting requirements for the IC1-Physical Risk return are as follows: (a) filing is optional for reinsurers, (b) filing is not required by mortgage insurers, and (c) filing is not required by life and health insurers.
The Returns will be completed annually on a fiscal year-end basis and will be required to be filed within 180 days of the insurer's fiscal year-end date.
We recommend that insurers begin to familiarize themselves with the information requirements in the Returns.
Upcoming information session: Standardized climate scenario exercise
On April 11, 2024, OSFI announced the second phase of the Standardized Climate Scenario Exercise (SCSE) consultation. OSFI intends to use the SCSE to raise awareness of potential exposures to climate-related risks, build capacity to conduct climate scenario analysis and risk assessments and provide a standardized quantitative assessment of climate-related risks, both transitional and physical in nature.
OSFI and the Autorité des marchés financiers will be holding an information session regarding the SCSE for stakeholders on May 2, 2024. Although the SCSE remains open for consultation, OSFI has encouraged FRFIs that wish to begin work on their SCSE submission to do so by mapping in-scope exposures for the transition risk modules to their SCSE industry sectors, and by geocoding in-scope exposures for the physical risk modules.
For more information, please do not hesitate to contact a member of Dentons Canada's Corporate and Regulatory Insurance group.
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