On March 7, 2023, the Canada Office of the Superintendent of Financial Institutions (OSFI) released the final version of Guideline B-15: Climate Risk Management (Guideline B-15). This development comes after OSFI conducted a public consultation process for the draft version of Guideline B-15, which was released in May, 2022 (the Consultation Process). We previously published a summary of the draft Guideline B-15, which can be accessed here. In releasing Guideline B-15, OSFI noted that the Consultation Process was one of the most extensive conducted to date and resulted in OSFI receiving over 4,300 submissions from industry stakeholders. Guideline B-15 will be effective for federally regulated insurers in Canada (“FRIs”) as of their respective fiscal year-ends in 2025.
Guideline B-15 establishes OSFI’s expectations related to FRIs’ (along with other federally regulated financial institutions’) management of “climate-related risks,” and it aims to support FRIs in developing greater resilience to, and management of, such risks.
OSFI classifies “climate-related risks” into two categories, physical risks and transition risks (collectively, Climate-Related Risks”): (i) “physical risks” refer to the financial risks arising from the increasing severity and frequency of extreme climate change-related weather events, longer-term gradual shifts of the climate and indirect effects of climate change, such as public health implications; and (ii) “transition risks” refer to the financial risks related to the process of adjustment towards a low-greenhouse gas (GHG) economy. OSFI states that these transition risks can emerge from current or future government policies, legislation and regulation to limit GHG emissions, as well as technological advancements and changes in market and customer sentiment towards a low-GHG economy.
FRIs’ compliance obligations under Guideline B-15
Governance and risk management expectations
OSFI notes that there is no one-size-fits-all approach for FRIs’ management of climate-related risks, since risks and vulnerabilities will vary with FRIs’ size, nature, scope, complexity of operations and risk profile. In addition, OSFI states that Guideline B-15 should be read, and implemented, from a risk-based perspective that allows FRIs to compete effectively while managing its climate-related risks prudently.
FRIs will need to undertake certain actions in order to comply with Guideline B-15, including the following:
a) having the appropriate governance and accountability structure in place to manage climate-related risks. Such governance and accountability structures should be developed with reference to OSFI’s Corporate Governance Guideline. In addition, this should include considering how senior management compensation policies and related practices should incorporate climate-related risk considerations;
b) incorporating the implications of Climate-Related Risks into their respective business models and strategies. This should include the development and implementation of a Climate Transition Plan (the Plan);
c) managing and mitigating climate-related risks in accordance with their respective Risk Appetite Frameworks and Enterprise Risk Management frameworks, and having processes and controls to identify and measure the current and potential impact of climate-related risks on their respective portfolios of exposures. Where FRIs use tools and models developed by external third parties to support their assessment of climate risks, FRIs should sufficiently understand the embedded data, methodology, assumptions and limitations in such tools;
d) having internal reporting systems that can produce reliable, timely and accurate reporting on Climate-Related Risks to support strategic planning and risk management. In addition, FRIs should monitor and report on relevant internal metrics, limits and indicators to assess the effectiveness of their respective climate risk management;
e) using climate scenario analysis to assess the impact of climate-related risks on FRIs’ respective risk profiles, business strategies and business models. OSFI notes that “climate scenario analysis” uses a hypothetical future state of the world to assess the impact of climate-related risks on FRIs’ respective operations. FRIs will be required to complete standardized climate scenario exercises and report their respective results to OSFI on a periodic basis (in addition to FRIs’ own internal climate scenario analyses); and
f) maintaining sufficient capital and liquidity buffers for their respective climate-related risks.
Climate-related financial disclosures
Chapter 2 of Guideline B-15 requires that FRIs make certain disclosures as set out in Annexes 2-1 and 2-2 of the guideline. The prescribed disclosures relate to FRIs’ respective (i) governance, (ii) strategy, (iii) risk management and (iv) metrics and targets. As noted above, Guideline B-15 will be effective for FRIs as of their respective fiscal year-ends in 2025, and following such fiscal year-end the required disclosures must be made no later than 180 days following the FRI’s fiscal year-end. FRIs should maintain an ongoing archive of all disclosures relating to prior reporting periods.
Guideline B-15 states that FRIs’ disclosure must adhere to the following principles:
a) All relevant information should be disclosed.
b) Specific and comprehensive information should be disclosed.
c) Disclosure should be clear, balanced and understandable.
d) Information disclosed should be reliable and verifiable, and appropriate for FRIs’ respective size, nature and complexity.
e) Information should be disclosed consistently over time.
It is important to note that FRIs may exercise discretion regarding the location of the disclosures required by Guideline B-15. Such locations may include reports to shareholders or in a stand-alone report (i.e. a standalone ESG report).
What’s next for OSFI’s climate risk guidance?
In releasing Guideline B-15, OSFI notes that it intends to review and amend the guideline as practices and industry standards surrounding climate risk evolve. In particular, this includes potential updates to OSFI’s disclosure expectations in Chapter 2 of Guideline B-15 when the International Sustainability Standard Board publishes its Standard IFRS S2 Climate-related Disclosures. In addition, OSFI will continue to engage stakeholders in its climate risk management work by launching its climate risk forum in the spring 2023.
Dentons Canada’s corporate and regulatory insurance team would be pleased to assist with the development of internal policies and procedures to assist with Guideline B-15 compliance.
For more information on this topic, please contact the authors Laurie LaPalme, Derek Levinsky, and Jesse Collins-Swartz.
