Backgrounder: Strengthening Climate Risk Financial Resilience: Insights from the Standardized Climate Scenario Exercise

Overview

In 2024, the Office of the Superintendent of Financial Institutions (OSFI) worked with the Quebec Autorité des marchés financiers (AMF) on the Standardized Climate Scenario Exercise (SCSE).

The exercise involved analyzing hypothetical scenarios to understand how climate-related risks might affect financial institutions, their counterparties, and the industry more broadly.

OSFI and the AMF have analyzed the submissions from financial institutions and published a report with insights from the exercise.

Why it’s important

Climate-related risks can have financial impacts that can affect the stability of Canada’s financial system. These risks are complex, long-term, and uncertain, making them hard to measure.

The SCSE is important because it:

• helps financial institutions understand their potential exposures to climate-related risks
• improves institutions’ ability to conduct climate scenario analysis and risk assessments
• allows OSFI to compare results across institutions and identify systemic vulnerabilities
• informs policy by providing insights that can guide regulatory expectations and supervisory strategies

Key takeaways

It is important to remember that this was a foundational exercise and that there are limitations. OSFI’s analysis suggests:

• the exercise improved the ability of institutions to identify, assess, and measure climate-related risks using standardized frameworks and methodologies.
• subject to the modeling limitations of the current exercise, institutions are financially resilient to withstand modeled physical and transition risk losses, indicating that climate-related financial risks are not an immediate threat to financial stability.
  • however, some institutions have exposures to regional physical risk concentration and sectoral vulnerabilities.
• there is a need to improve how climate risk considerations are integrated in underwriting practices, strategic planning, and enterprise risk management.

Way forward

OSFI and the AMF will incorporate these findings into ongoing supervisory expectations and risk management guidance. Future work will focus on assessing financial institutions’ ability to measure and adequately price catastrophic and climate-related financial risks using robust, data-driven approaches.