Canadian bill would require climate capital requirements

March 28, 2022|Written by Graham Caswell|Office of the Superintendent of Financial Institutions (OSFI), Bank of Canada

Canadian banks would face capital requirements for fossil fuel exposures under a proposed law now before Canada’s parliament. Introduced by independent Senator Rosa Galvez, the Climate Aligned Finance Act would require capital adequacy requirements proportionate to the climate risks generated by financial institutions, including the consideration of a risk weight of 1,250% for “any loan, bond or derivative exposure to new fossil fuel resources or infrastructure”.

A 1,250% risk weight or ‘one-for-one’ requirement would oblige financial institutions to finance new fossil fuel projects solely from their own funds, thus protecting depositors and tax payers from stranded assets and other climate-related risks.

The new legislation would also amend the Bank of Canada’s mandate to require the alignment of its activities with Canadian climate commitments; require financial institutions to develop action plans and targets; establish a duty of alignment with climate commitments for directors and officers of entities; and require the appointment of a person with climate expertise to certain boards of directors.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, plans to release draft guidelines on climate risk management for Canadian financial institutions later this year, including a goal to ensure that institutions “remain adequately capitalised and liquid through severe yet plausible climate risk scenarios over extended time horizons”.

“We’ve seen a major ramping up of net-zero commitments from the public and private sector, but we must face the elephant in the room: our financial system continues to fund activities that fuel climate risk,” said Senator Galvez in a press release introducing the proposed act. “Canadians are asking for legislative solutions that will help accelerate the transition and achieve our targets. The only scenario in which our financial sector will thrive and prosper for generations to come is the one where we pursue a coherent and orderly transition.”

Alongside the proposed legislation, Senator Galvez also released a comprehensive white paper examining Canadian fossil fuel funding and the resulting systemic risks to financial stability and critically reviewing key concepts and international initiatives concerning the financing of climate change.

An independent Senator for the province of Quebec, Rosa Galvez holds a PhD in environmental engineering and is a professor at Laval University. She was a sponsor of the Canadian Net-Zero Emissions Accountability Act which was adopted in June 2021, and was the recipient of the 2021 Clean50 award for her parliamentary work on environmental policy.

This page was last updated March 28, 2022

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