This story has been updated to include comments from the Office of the Superintendent of Financial Institutions.
A regulator’s pledge to plan for a “more ominous scenario” when faced with possible business risk—but not climate risk—has climate finance experts calling on Superintendent of Financial Institutions Peter Routledge to set higher expectations for Canada’s banks and pension plans.
Routledge’s Office of the Superintendent of Financial Institutions (OSFI) supervises federally-regulated financial institutions and pension plans “to contribute to public confidence in the financial system,” its website states. On Friday, Routledge attended a conference hosted by the Toronto-Dominion Bank, where he warned that some lenders could face “meaningful”, higher-than-expected losses from their investments in commercial real estate.
“You could say that conditions are less bad in the Canadian office space market, but we’re regulating to a more ominous scenario as a just in case,” Routledge said. “The Canadian institutions will be quick to point out to us that we’re too careful. We try and listen empathetically, but our job is to think of the worst and hope for the best.”
That position had several close observers scratching their heads this week, after OSFI’s new rules for regulated institutions, Guideline B-15, introduced voluntary climate guidelines, called on companies to set aside funds to account for climate-related risks, but did not mandate specific targets for them to meet.
“It’s not prescriptive. We’re very deliberate in that because if we give institutions a target, then they will just manage that target,” Stephane Tardif, managing director of OSFI’s Climate Risk Hub, said at the time.
Instead, “we’ve actually asked for mandatory climate-related disclosures. The fact that they’re mandatory is going to help us benchmark institutions against each other on how they’re managing the expectations.”
Several close observers contacted by The Energy Mix said OSFI would do well to show the same resolve on climate risk that it does when it looks at investments in office space and multi-unit housing.
“It is critical that OSFI listen empathetically to climate experts, and climate finance experts, from around the globe, as well as the public,” said Sen. Rosa Galvez (ISG-QC), whose Climate-Aligned Finance Act, Bill S-243, is currently before the Senate Banking, Commerce, and Economy Committee for study. But Guideline B-15 “falls short of requiring banks to align capital adequacy requirements with climate risks.”
S-243 “provides guidance on how the Canadian financial sector, and OSFI in particular, can align their approach with climate risk,” and with “the principles of the precautionary approach, thus supporting a sustainable Canadian economy in the face of climate change,” Galvez added in an email. In 2024, she said the agency should “implement a robust approach to climate-aligned finance”, address concerns over conflict of interest on institutions’ boards of directors, and take steps to increase climate expertise among board members.
In an email late Tuesday, an OSFI spokesperson said the agency “has a high appetite for early intervention to address risks that could jeopardize the public’s confidence in the soundness of the Canadian financial system,” citing Guideline B-15 as the document that “sets out our expectations for the sound management of climate-related risks for federally regulated financial institutions.” He reiterated previous comment from OSFI that its “principal objective is to support federally regulated financial institutions (FRFIs) in their efforts to build awareness and capability in managing climate-related financial risks,” adding that “we are satisfied with our progress to date on instilling sound climate risk management principles.”
Adam Scott, executive director of Shift: Action for Pension Wealth and Planet Health, wrote that OSFI “has yet to adopt the required precautionary approach,” even after recognizing that “delaying climate policy action increases the overall economic impacts and risks to financial stability.” While Guideline B-15 is a good start, “given the lack of teeth in the current OSFI guidance to date, perhaps OSFI may have been listening too empathetically to the views of financial institutions that just want to be left alone to continue business as usual.”
Scott cautioned that OSFI “continues to see its own mandate too narrowly, and has focused primarily on establishing climate risk transparency and disclosure guidance for the banks,” operating under the “false assumption that correcting for climate risks only requires better risk analysis and disclosure.” In 2024, he said the agency should require all regulated financial institutions to produce their own climate transition plans, with long-term targets “matched by the action needed to achieve them in the short and medium term.”
Julie Segal, senior manager, climate finance at Environmental Defence Canada, said bank regulators in other countries are moving to require climate transition plans from the institutions they oversee, and Canada should follow suit.
“While the Canadian economy is expected to lose billions of dollars in the coming years due to climate damage, Canadian banks are still the largest global financiers of fossil fuels, the leading cause of climate change,” she wrote. “Banking regulators should be ensuring that financial institutions have plans to reduce the emissions footprint of their investments, which is the best way to reduce climate change and its resulting damage.”
Matt Price, executive director of Investors for Paris Compliance, agreed that “we’re not going to see real progress with financial institutions in Canada without regulation,” but warned the OSFI might not be too inclined to make that happen.
“OSFI believes that it’s out on a limb already on climate with its activities on B-15 and with the climate scenario exercise,” Price wrote. “And relative to doing nothing, this may be true—we need to give credit that it is starting to consider climate as a core part of its mandate.”
But just like the financial institutions themselves, “OSFI is greatly underestimating the risk that climate poses to the financial system and also refuses to entertain what’s called ‘double materiality’, the common sense acknowledgement that this is not a one-way relationship, that financial institutions themselves are helping create this risk via their activities,” he said.
OSFI’s approach points to a “very different” culture from the United States’, where regulators like the Securities and Exchange Commission “see themselves as establishing clear lines and policing them through enforcement,” Price told The Mix. By contrast, “OSFI has a cosy relationship with the banks and insurance companies and prefers what it calls a ‘principles-based’ approach, communicating a broad direction and having behind-the-scenes conversations about it. That, of course, provides a lot of wiggle room to financial institutions, probably too much.”
The OSFI spokesperson said the agency is “not finished and will proceed with urgency and integrity in ensuring sound climate risk management at FRFIs.” OSFI “understand[s] the importance of FRFIs (boards and management teams) acting early in response to intensifying climate risk,” he wrote, and will be updating its expectations for transparency and consistent climate risk reporting to match a new standard issued last year by the International Sustainability Standards Board.
OSFI is also “developing regulatory climate data returns for banks and insurers to collect relevant climate risk data so that we can understand the impacts of climate-related risks at both the institution level as well as on the Canadian financial system,” the spokesperson added, along with a “standardized climate scenario analysis exercise for regulated institutions to study the impact of climate-related risks on their portfolios, now and in the future.