Assistant Superintendent Tolga Yalkin participates in a panel discussion at Michael D. Penner Institute Conference
Speech - Montreal -
In order to provide context for our panel, I will begin by talking a little bit about OSFI’s role and how we are helping financial institutions stay ahead of today’s risk environment through our climate change guidelines and supervisory work.
In today’s rapidly changing risk environment, financial institutions, private pension plans and credit unions face many increasingly complex and interconnected risks. And rest assured – this change will not be slowing down, quite the contrary.
Whether related to climate, economic risks or digital innovation, managing these risks is becoming increasingly difficult.
Climate change and the international response to the threats it poses could have significant financial implications for the safety and soundness of the Canadian financial system.
As a prudential regulator, OSFI has a strong interest in managing the risks of financial institutions and the potential impacts on the financial viability of institutions should those risks materialize. Please tell us about OSFI’s concrete actions in climate risk management—I am referring in particular to the expectations created by Guideline B-15 and the ongoing consultation on the Standardized Climate Scenario Exercise (SCSE).
Pragmatic jurisdiction
The more we look at the details of climate risk management, the more I am convinced that climate change has a pervasive influence on traditional financial risks such as credit and market risks, operational risks and insurance risks.
It is a financial risk that is not quite the same as, for example, credit risk or market risk – but ultimately, climate risk is a transverse risk that underlies traditional financial risks. Therefore, it should be treated as a separate financial risk and analyzed using more detailed data related to climate change and greenhouse gas (GHG) emissions exposure.
Guideline B-15: Climate Risk Management
Issued in March 2023, Guideline B-15 is our first supervisory framework that is climate‑sensitive and recognizes the impact of climate change on managing risk in Canada’s financial system.
We recently released a revised version of Guideline B-15, Climate Risk Management, which sets out OSFI’s expectations for managing this type of risk.
In this new version, the expectations for federally regulated financial institutions (FRFIs), set out in Annex 2-2, now align with those of the International Sustainability Standards Board’s final IFRS S2 Climate-related Disclosures standard.
Concurrently, OSFI developed new climate risk returns to collect standardized emissions and exposure data from FRFIs.
The data collected by OSFI will enable it to carry out evidence-based policy development, regulation and supervision related to climate risk.
We are also eagerly looking forward to the decisions of the Canadian Securities Administrators regarding their disclosure policies. We certainly want to foster a constructive partnership with them.
OSFI’s Standardized Climate Scenario Exercise
Financial institutions and the regulators that supervise them need concrete data to better manage climate risk.
For this reason, on April 11, our office announced the second phase of the Standardized Climate Scenario Exercise (SCSE) consultation.
The purpose of this exercise is to:
- help financial institutions better understand their potential exposure to climate risk;
- build institutions’ capacity to conduct climate risk scenario analyses and assessments; and
- measure the potential financial exposures to climate risk across institutions.
Feedback from the first phase of the consultation was used to update the draft methodology and create a set of instructions. To learn more, you can consult our What We Heard Report, available online.
Institutions have until June 7, 2024, to submit comments on the second phase of the consultation.
OSFI is working with the Autorité des marchés financiers (AMF), which will run this exercise in parallel with some of its regulated financial institutions in Quebec.
Through this collaboration, our respective offices aim to expand the number and type of financial institutions submitting results for analysis. (We will be holding a joint information session this afternoon in this regard.)
You both represent your respective organizations on international regulator forums, which gives you great insight into what your peers are doing elsewhere in the world. To what extent does the oversight being developed internationally influence your thinking and actions?
Given that financial markets are global and interconnected, to what extent should we also try to align in terms of the oversight of lenders and financial institutions?
OSFI collaborates extensively with various international standard-setting bodies, including the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), to name a few.
We are striving to ensure that the development of these international standards reflects our Canadian perspective. But once an international standard has been developed, we carefully examine it and ask ourselves: Are there any adaptations that would make sense when we consider introducing it to Canada and incorporating it into one of our guidelines?
Then we take a very close look at the standards and ask ourselves: Are all the different elements of these standards relevant to Canada? Do we need to change anything? Do we need to adapt something? And then, finally, we reflect these standards, more or less, in our guidelines.
There are benefits to harmonizing regulatory requirements for financial institutions. With respect to climate risk, OSFI recognizes the importance of not creating undue complexity in this area. For this reason, we updated Annex 2-2 of our Guideline B-15 last March to align it with the International Sustainability Standards Board’s (ISSB) final IFRS S2 Climate-related Disclosures standard. This streamlines climate-related reporting and promotes transparency of climate risk.
Setting aside the topics of modern slavery and climate change on which we have made progress in Canada, let’s focus on what more should be done in terms of legislative or regulatory developments to achieve a more sustainable world. There is a lot of talk about diversity, especially on corporate boards and management teams. There is also growing talk of the impact of business activities on the decline of biodiversity and degradation of ecosystems. In this regard, we should mention the creation of the Task Force on Nature-related Financial Disclosures (or TNFD) and the publication in September 2023 of its recommendations on nature-related disclosures.
In your view, what are the major ESG themes that should be on the agenda in the coming years to lead us to a more sustainable world?
I think transition plans are something regulators are looking at internationally. This is an area of financial supervision that is progressing rapidly. OSFI co-leads the Network for Greening the Financial System (NGFS) transition plan monitoring team.
The purpose of creating a transition plan is to help financial institutions undertake an assessment of the impact of climate-related risks on their short- and long-term strategic and financial plans and develop a plan to address and mitigate physical and transition risks.
The NGFS team recently released several reports describing the complexities involved in transition planning. Last year, the team released a report outlining key findings from a current-state assessment exercise in collaboration with regulators.
These reports will serve as valuable resources for many regulators around the world as they work to develop their own transition plan frameworks in their jurisdictions.
I believe it is relevant to mention that OSFI is currently primarily focused on climate risk, and it is difficult for us to comment further on ESG.