Thank you Rob [Pritchard, chair, Torys LLP] for that kind introduction. It is a pleasure to be here to speak to all of you this morning.
Our topic of discussion for this session is an area of that has seen a recent upsurge of interest and concern, and one to which OSFI is devoting an increasing amount of time, resources and brainpower.
I am talking of course about climate-related risk. How it affects today–and will affect tomorrow– the financial institutions that OSFI regulates, how OSFI is conducting research to map its possible impacts, and how we are working with partners to create a prepared and resilient financial system, will be our main topics.
Let’s start with established facts. There is clear evidence that Canada’s climate is getting warmer, and that this trend is due in large part to greenhouse gas emissions created by human activity. It’s also obvious that this changing climate is creating more extreme climate-related events, both here at home and in other countries around the world.
Finally, it’s a fact that the Canadian government has made commitments to fight climate change by limiting the increase in global temperature in coming decades. The Government has demonstrated this by endorsing the Paris Agreement and enacting policies that foster climate resilience and support the transition to a low (or zero)-greenhouse gas economy.
For OSFI, our focus in these matters is prudential. That is to say that our unique role is to ensure that Canadians continue to enjoy financial stability as climate-related risks manifest themselves. This is a very important role, and one that we take very seriously, especially as we are the only arm of the Government of Canada that is equipped to meet this prudential responsibility.
With that goal in mind, on January 11 we released a discussion paper titled
Navigating Uncertainty in Climate Change. You can find a link to it on OSFI’s home page. If you haven’t already downloaded it for a look, I encourage you to do so and then provide your comments. We need your expertise and sage advice.
Transitioning from today’s greenhouse gas-intensive economy, to a lower – or even zero – greenhouse gas-emission economy is a very important goal. It’s also a wide-ranging and completely unprecedented undertaking. That means that there is a great deal that we don’t know about how the transition will affect the economy, nor when those changes will take place. That is why we called our discussion paper: “Navigating Uncertainty.”
What is clear is that our job in all of this includes ensuring that the financial system is prepared for the full range of plausible transition scenarios. That’s why we are studying potential transition risks related to climate change through our pilot project with the Bank of Canada announced in November 2020.
Of course, transition risk is not the only climate-related risk we face. There are also the physical risks posed by the changing climate itself: damage to or loss of real property and other physical assets as a result of weather events, natural disasters, rising sea levels, and the like. These can put pressure on insurers, if they are not well managed. They can also weigh directly on the operations of financial institutions, and more importantly, on their borrowers and investments.
Not to be neglected are the possible liability risks that could arise. Governments in Canada have already seen the launch of some litigation related to climate change; two such examples are
La Rose et al v Her Majesty the Queen, against the federal government, and
Mathur et al v. Her Majesty the Queen against the Government of Ontario. It remains to be seen whether climate change-related legal claims will also increase in the private sector in Canada, but we are seeing an increase in activism using the courts in other countries. Such actions could potentially lead to large liability insurance claims, and to judgements directly against financial institutions.
As I noted at the outset, we are in the midst of a consultation process on our discussion paper. Through this process, as well as our ongoing internal research and strategic review, we are looking at all the tools at our disposal – capital, supervision and disclosure – to explore how climate-related risks could affect the Canadian banking and insurance industries and so to determine the appropriate regulatory and supervisory actions.
Many investors and consumers see climate as part of a larger suite of issues that are often grouped under the rubric of Environmental, Social and Governance, or ESG. It’s a deliberately broad concept, much broader than the traditional financial risks that usually occupy the minds of a prudential supervisor like OSFI.
That said, there is clearly a link between any issue that can preoccupy investors and consumers and the safety and soundness of financial institutions. That link is reputation risk. If a reputational issue becomes severe enough to affect peoples’ willingness to invest in a financial institution, or to do business with that institution, it becomes a prudential issue.
Your clients, the institutions OSFI supervises, understand our expectations about risk management. We expect the institutions to be forward-looking and proactive, and to take into account all the ways that risk in all its forms can affect their operations. This includes managing their reputation risk.
I will stop to note that supervising reputation risk, including ESG issues, poses a very particular challenge for OSFI. Yes, if reputation issues become acute enough they can certainly affect the stability of a financial institution. However, we also have to recognize that Parliament has set limits on our authority, and has assigned responsibility for many ESG-related issues to other arms of government. This means that we have to keep our focus on the risks that ESG issues pose to the safety and soundness of the institutions, and we have to be guided by the evidence about those risks.
I suspect that some of you will be comforted by this stance, whereas a few may be alarmed. To the latter I would say: Parliament has granted us extensive authorities, and wide discretion in using those authorities, so it is very important that we use those authorities only as Parliament has intended.
You can be confident that we will continue to work with you and your clients to meet the prudential challenges yet to come, just as we’ve met the challenges of the past together.
With that, I’d like to now turn it over to Blair Keefe to get the dialogue rolling. I am looking forward to hearing your views on this important topic.