Governance Briefing — March 7, 2023
OSFI’s Guideline B-15 cements climate risk governance, scenario analysis, and disclosure expectations for Canada’s federally regulated financial institutions beginning with fiscal 2024 reporting.
Executive briefing: Canada’s Office of the Superintendent of Financial Institutions (OSFI) finalised Guideline B-15: Climate Risk Management on 7 March 2023, setting binding expectations for banks and insurers to embed climate scenario analysis, governance, and financial disclosures into their risk frameworks starting in fiscal 2024. The guideline compels federally regulated financial institutions (FRFIs) to treat climate risk as a mainstream prudential issue, codifying board accountability, second-line independence, capital planning integration, and transparent reporting.
Capabilities: Align climate risk governance, analytics, and disclosure
OSFI’s framework focuses on two pillars: governance and risk management (Chapter 1) and climate-related financial disclosures (Chapter 2). Boards must define risk appetite for climate exposures, oversee strategy execution, and ensure management information supports timely decision-making. Senior management is responsible for operationalising policies, assigning accountability across lines of defence, and ensuring adequate expertise and resources. Risk and compliance functions must demonstrate they can challenge first-line decisions and escalate emerging risks.
FRFIs are expected to integrate climate considerations into enterprise risk management, including credit, market, liquidity, operational, and insurance risk. This requires data collection on counterparties’ emissions, transition plans, and physical risk exposures. Institutions should map climate risk transmission channels, evaluate concentration risks, and assess correlations with macroeconomic scenarios. OSFI also highlights the need for scenario analysis covering both transition and physical pathways, differentiating between short-, medium-, and long-term horizons.
Disclosure capabilities must align with the Task Force on Climate-related Financial Disclosures (TCFD) structure—governance, strategy, risk management, and metrics & targets. Large banks and insurers must begin phased public disclosures for fiscal years ending in 2024, including Scope 1 and Scope 2 emissions and, where material, Scope 3 financed emissions. Smaller institutions have an extra year, but all FRFIs must provide qualitative narratives on climate risk integration and quantitative metrics aligned with OSFI’s expectations.
Implementation sequencing: Build climate risk infrastructure
Immediate priorities. Establish a cross-functional steering committee with representation from risk, finance, treasury, sustainability, legal, and business lines. Perform a gap assessment against Guideline B-15’s governance and risk management expectations, mapping existing policies, risk appetites, and board reporting. Inventory climate data sources—internal, client-provided, third-party—and evaluate data quality, coverage, and controls. Align disclosure workstreams with annual reporting cycles to determine when narrative and quantitative information will be available.
Near-term (within 6 months). Update board and management charters to embed explicit climate risk oversight responsibilities. Define risk appetite metrics—such as financed emissions intensity, sectoral lending limits, or exposure thresholds to high-risk geographies—and align them with capital planning. Integrate climate factors into credit underwriting templates, counterparty due diligence, and investment decision workflows. Launch scenario analysis pilots using OSFI’s recommended scenarios or Network for Greening the Financial System (NGFS) pathways, documenting assumptions, model limitations, and sensitivity testing.
Medium-term (6–18 months). Incorporate climate stress results into Internal Capital Adequacy Assessment Process (ICAAP) and Own Risk and Solvency Assessment (ORSA) cycles, adjusting capital buffers or reinsurance strategies as warranted. Implement data management controls, including lineage, validation, and governance structures that satisfy OSFI’s expectations for model risk management. Expand disclosures to cover financed emissions methodologies, portfolio alignment metrics, and climate-related remuneration incentives. Develop training programmes for board members and executives to interpret climate analytics and challenge management.
Responsible governance and controls
OSFI emphasises that boards must understand the limitations of climate models and ensure that management is not over-relying on unvalidated assumptions. Institutions should establish escalation protocols for threshold breaches, with documentation of remediation actions and timelines. Internal audit must periodically assess climate risk frameworks, testing policy adherence, data controls, and disclosure accuracy.
Compensation committees should consider how climate risk objectives influence performance evaluations and incentive plans, consistent with OSFI’s broader expectations on risk-aligned remuneration. Policies governing third-party risk management should incorporate climate considerations for outsourcing and supply-chain partners. For insurers, product design should factor climate-related claims volatility, with underwriting guidelines updated accordingly. Banks should align climate strategies with credit portfolio management, securitisation practices, and collateral valuation processes.
Legal and compliance teams must monitor evolving provincial, federal, and international regulations to maintain consistency across jurisdictions. For example, institutions with global operations may need to harmonise OSFI requirements with the U.S. Securities and Exchange Commission’s proposed climate disclosures or the European Union’s Corporate Sustainability Reporting Directive. Documenting reconciliations helps demonstrate diligence to OSFI supervisors.
Sector playbooks and client engagement
Corporate and commercial banking. Develop sector-specific transition frameworks covering energy, mining, transportation, real estate, and agriculture. Engage clients with high emissions profiles to set decarbonisation pathways, offering sustainability-linked financing structures tied to measurable targets. Track client commitments, monitor progress, and escalate non-compliance with covenants or transition expectations.
Retail banking and mortgages. Integrate physical risk assessments into property valuations and underwriting criteria, considering flood, wildfire, and extreme weather exposure. Offer green mortgage products or retrofit financing to encourage resilience investments. Provide educational materials for borrowers on climate adaptation measures.
Insurance. For property and casualty carriers, update catastrophe models with latest hazard data, adjust underwriting appetites, and explore parametric insurance solutions for climate-driven perils. Life insurers should assess how heat, air quality, and disease patterns affect mortality and morbidity assumptions. Reinsurers must evaluate counterparty risk, retrocession strategies, and capital adequacy under severe climate scenarios.
Asset management. Embed climate risk analytics into portfolio construction, stewardship policies, and proxy voting guidelines. Align with global reporting frameworks such as the International Sustainability Standards Board (ISSB) to ensure consistency in disclosures across jurisdictions.
Measurement, metrics, and reporting
OSFI expects FRFIs to develop climate metrics that connect to business decision-making. Key indicators include financed emissions (absolute and intensity), portfolio alignment metrics (e.g., implied temperature rise), exposure to sectors vulnerable to transition risk, insurance probable maximum loss metrics, and operational emissions targets. Institutions should monitor scenario analysis outputs, tracking projected credit losses, changes in risk-weighted assets, and capital impacts.
Disclosures must include methodologies, assumptions, and data limitations to provide transparency. Institutions should establish internal controls over climate reporting similar to those used for financial reporting, including management certification and board approval. Audit committees should oversee assurance engagements—internal or external—to validate climate disclosures.
Feedback loops are critical: integrate climate metrics into management dashboards, performance reviews, and strategic planning. Conduct regular post-mortems on climate incidents—such as catastrophic weather losses or regulatory findings—to refine risk appetite and controls. Share insights with regulators through supervisory colleges and industry forums to demonstrate proactive risk management.
Sources
- Office of the Superintendent of Financial Institutions — Guideline B-15: Climate Risk Management (March 2023).
- OSFI news release announcing Guideline B-15 expectations (7 March 2023).
- OSFI Information Report — Climate risk management guideline highlights (March 2023).
Zeph Tech equips FRFIs with climate data governance, scenario analysis tooling, and board reporting structures that satisfy OSFI’s Guideline B-15 expectations.
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