A September 30 deadline is looming for public comment on a new guideline meant to protect Canada’s finance sector from climate impacts, without addressing finance’s role in driving the climate emergency, an outside analyst warns.
The May, 2022 draft on climate risk management issued by the Office of the Superintendent of Financial Institutions (OSFI) “tries to tackle climate risk to the financial system, but it’s ignoring the risk posed by the financial system in worsening climate change,” said Julie Segal, senior program manager, climate finance at Environmental Defence Canada, in an interview this week.
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The opportunity the little-known federal regulator is missing, Segal said, is to require federally-regulated banks and pension plans to hold more cash in reserve to match the added risk they take on when they invest in new fossil fuel projects.
A Leadnow petition urging OSFI to “introduce stringent and effective climate regulations for big banks” had generated 6,652 signatures as of Wednesday evening.
OSFI published its draft of Guideline B-15 in a bid to encourage financial institutions to factor climate risk into their operations. “Climate change and the global response to the threats it poses have the potential to significantly impact the safety and soundness of federally regulated financial institutions (FRFIs), and the financial system more broadly,” OSFI states.
“Climate-related risks may manifest over varying time horizons, and are likely to intensify over time, especially if the global economy undergoes a disorderly transition,” the draft guideline adds. “They can drive financial risks, such as credit, market, insurance, and liquidity risks. They can also lead to strategic, operational, and reputational risks. In severe instances, climate-related risks can threaten the long-term viability of a FRFI’s business model.”
But the guideline isn’t mandatory: instead, it “aims to support FRFIs in developing greater resilience to, and management of, these risks,” OSFI states. It encourages institutions to assess their own climate vulnerabilities “from a risk-based perspective that allows the FRFI to compete effectively while managing its climate-related risks prudently.”
It calls for institutions to:
• Factor “the implications of climate change and the transition to a low-greenhouse gas (GHG) economy” into their business models and strategies;
• Put governance, policies, and practices in place to manage climate-related risk;
• Adequately price assets and liabilities that are sensitive to climate risk;
• Look at their own operational resilience to mitigate the impact of climate disasters on critical operations;
• Use climate scenario analysis to assess the impacts of climate change on their own risk profiles, business strategies, and business models;
• Maintain enough cash reserves to buffer themselves against climate risk;
• Commit to “high-quality and decision-useful disclosures” on climate risk that are relevant, specific, clear, verifiable, objective, and easy to understand.
OSFI originally set an August 19 deadline for comments, but later extended it to the end of this month. The guideline calls for annual disclosures for fiscal year-ends beginning October 1, 2023.
Segal said the guideline misses the most important connection between the country’s financial sector and climate change. “Even looking at this from a financial perspective, the guideline fails to confront how the financial system is investing in its own climate crash,” she said. “The more that financial institutions invest in oil, gas, and coal, the worse climate change is going to be, and the worse climate risk will be to those institutions. So the best way to reduce climate-related risk is to mitigate climate change.”
The agency’s decision to issue a guideline, rather than a mandatory rule, was consistent with its usual practice, she added. “This is how they operate and do business, but that’s a bit of a problem in this crisis, given finance’s contribution and relationship to the crisis,” she told The Energy Mix. “It needs to be enforceable, there needs to be accountability, but most importantly, OSFI has to take off the blinders and look at how financial institutions are worsening climate change that therefore destabilizes the entire financial system.”
That begins with recognizing investors’ role in enabling fossil fuel exploration and development, despite that International Energy Agency’s warning last year that new oil, gas, and coal projects are inconsistent with a 1.5°C limit on average global warming.
Segal said OSFI could pull financial institutions away from new fossil fuel projects by requiring them to hold larger capital reserves that reflect the added business risk they’re taking on—just as international banking regulators are setting tougher capital requirements for risky cryptocurrency assets. “It’s something they could easily translate, if they wanted to, to assets and investments that pose a risk because of the climate crisis.”
An OSFI spokesperson wouldn’t say whether the agency is inclined to follow that advice. “OSFI continues to assess whether climate-related risks are already sufficiently incorporated within our capital regime, or whether we need to modify existing capital tools, or develop new ones,” she said in an email. “The guideline is still in its consultation stage and is not yet final.”