Canadian regulator to act on climate risk buffers

January 18, 2022|Written by Graham Caswell|Office of the Superintendent of Financial Institutions, Bank of Canada

Canada’s top financial regulator will act to ensure that banks and other financial institutions have sufficient capital to weather the effects of intensifying physical climate risk.

Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), told a conference of banking CEOs last week that the federal watchdog will reward “mature climate risk management” and punish poor or inadequate climate risk practices in supervised institutions.

“Our job is to ensure that Canada’s financial system remains resilient regardless of the [transition] pathway chosen,” Routledge told the meeting. The OSFI “will expect federally regulated financial institutions to build up their capital buffers in the 2020s to be able to weather an accelerated and volatile transition pathway in the 2030s, should that scenario come to pass,” he said.

Routledge’s intervention comes as the OSFI released the results of a pilot project on climate scenario analysis conducted with the Bank of Canada and six major financial institutions. The exercise involved a set of global climate transition scenarios to identify climate-related risks to the Canadian economy and the financial system. It found that the mispricing of transition risks could expose financial institutions and investors to “sudden and large losses”.

Launched in late 2020, the exercise built on climate scenarios developed by the Network for Greening the Financial System, expanding them to examine potential climate-related impacts on specific economic sectors.

The OSFI also plans to release draft guidelines on climate risk management for Canadian financial institutions later this year as part of a consultation process. The guidelines will outline the supervisor’s climate risk management expectations for Canadian banks, pension funds and other regulated institutions .They include a goal to ensure that these institutions “remain adequately capitalised and liquid through severe yet plausible climate risk scenarios over extended time horizons”.

The world’s 60 largest commercial and investment banks have invested over $3.8tn into fossil fuels since 2016. This has led to growing calls from civil society for increased capital requirements and buffers to ameliorate the risks associated with climate change, and the transition to a net-zero economy.

In the face of increasing concerns about a collapse in the value of fossil fuel assets, climate campaigners are seeking ‘one-for-one’ prudential capital requirements for the funding of new fossil fuel projects. Similar to proposals made by the Bank for International Settlements for cryptocurrency assets,this would require banks to invest in such projects from their own funds, protecting depositors, policyholders and tax payers from stranded assets and other climate-related risks.

Canada’s annual per capita greenhouse gas emissions are among the world’s highest, largely because of the country’s huge oil and gas sector. Canada’s six largest banks alone lent the fossil fuel industry CAN $137bn in 2020, up 50% from 2014.

This page was last updated January 18, 2022

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