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Strict new climate risk guidelines for banks, insurers “huge” for financial markets: ISF’s Riordan

March 9, 2023

On Tuesday, Canada’s Office of the Superintendent of Financial Institutions took a significant step towards mandating climate-related disclosures for Canada's largest banks and insurers when it issued new guidelines for climate-risk management.

Beginning late next year, Canada's major federally regulated financial institutions will have to disclose plans to manage climate risk, and conduct "stress tests" to anticipate the future "physical" and "transition" risks presented by climate change.

“It’s important that both physical and transition risks are covered,” says Ryan Riordan, Research Director at the Institute for Sustainable Finance. Physical risks have to do with the tangible costs of climate change including property damage, insurance costs and business disruptions caused by climate-related events such as increasingly frequent and severe floods, droughts, and fires. Transition risk is the risk involved with taking action on climate change, including reputational, regulatory and policy risks.

Crucially, with the new OSFI guidelines, “disclosure must be relevant, specific, comprehensive, clear, verifiable, consistent and understandable information,” says Riordan.

“This is huge. Firms have to makes sure that what they report is correct. They must develop a reporting methodology that will remain consistent over time. This is great for the financial markets because the information will be good enough to make long term investing and lending decisions. It also allows for a meaningful comparison over time and across similar firms.”

According to Riordan there will likely be challenges with implementing these reporting requirements. “The implementation deadline is soon and that there is unlikely to be enough capacity to perform this work well.” 

To learn more about physical risks, transition risks and stress testing, check out the ISF Primer by Senior Research Associate Simon Martin.

For a deeper dive, there's our study on the state of climate-related risk disclosures in Canada by ISF Chair Sean Cleary and Simon Martin.

And in a recent op-ed in Corporate Knights, Sean Cleary and CPA Canada President and CEO Pamela Steer call for regulations mandating climate-related disclosures for Canadian businesses more broadly. 

Media contact

David Watson, Associate Director, Communications

Institute for Sustainable Finance

david.watson@queensu.ca

613-796-3605