OSFI responses to climate risk discussion show need for global standards

Canada’s Office of the Superintendent of Financial Institutions (OSFI) has shone a light on the growing need for regulatory standards to combat climate risk within financial services.

In January 2021, OSFI published a discussion paper, Navigating Uncertainty in Climate Change, with a view to get industry opinion and feedback on the risks that are arising from climate change, particularly those that may affect the “safety and soundness of federally regulated financial institutions”.

In a recent letter, OSFI has compiled the feedback it received to its Discussion Paper, which highlights a reoccurring theme – that regulatory standards are key to managing climate related risks.

In an overarching summary, OSFI found that the majority of respondents said that they were in the early stages of assessing and quantifying climate-related risks. However, despite being in the early stages, there was a consensus that “any new OSFI climate-related guidance be principles-based and aligned with global standards where they exist”.

Summary of feedback

OSFI summarised the feedback in the following categories:

Climate-related risks

• It was agreed that climate-related risks are drivers of both financial and non-financial risks.
• OSFI’s definition or characterisation of physical climate-related risk should include the risk to public health due to extreme weather events, poor air quality and increased risk of vector-borne diseases due to changing temperatures, precipitation, and humidity.
• The standardisation of taxonomy, measurement methodologies and metrics across industry would improve the definition and management of such risks.

Preparing for, and building resilience to, climate-related risks

• It has been suggested that financial institutions could manage climate-related risks through existing governance and risk management frameworks and new tools. However, many FIs are still in the early stages of their climate-related assessments.
• There is a lack of availability of decision-useful data, analytical tools and skills, which poses challenges for FIs.

Climate-related financial disclosure

• It was suggested that stakeholder interest is a key motivating factor for voluntary climate-related financial disclosures.
• The Task Force on Climate-related Financial Disclosures (TCFD) recommendations is the most commonly followed model for climate-related financial disclosure.

OSFI’s role in climate change

• It was recommended that OSFI should harmonise guidance expectations and reporting requirements for FRPPs with provincial regulations and international standards setters.
• OSFI should consider standardising, mandating, or collaborating with other regulations, standard setters and stakeholders on climate-related scenario analysis, disclosure, risk measurement methods and taxonomy.

What happens next?

OSFI has said that it agrees that any guidance that it issues should be “principles-based” and consider both Canadian and international developments. OSFI will await the results of its joint pilot project regarding climate risk scenarios with the Bank of Canada, so that any guidance may be informed by them.

As such OSFI has said that it will be in a position to communicate next steps for climate-related policy work early in 2022.

CUBE comment

Last week, I explored the emerging regulatory landscape for cryptocurrency and noted the irony that something so innovative and border-transcending will ultimately be regulated by national financial regulators. Climate risk ultimately follows the same narrative.

The risks presented by climate change are not limited by jurisdiction. Of course, there will be some countries that are worse affected than others, but broadly speaking climate change is a global issue that doesn’t stop at state or country borders. For financial regulators and regulations, the opposite is generally true.

Financial institutions are grappling with all three tenets of environmental, social and governance (ESG), no more so than with the “E”, which is not only huge but also impossible to define concisely. It spans the length and breadth of financial services, from the changing values of assets, such as carbon, to the effect of catastrophic incidents, such as flooding, for the insurance industry. It is almost impossible to draw a line as to where “ESG” begins and where it ends.

Much like crypto, it is funny then that financial regulators are looking to create and implement ESG regulations in a nationalistic way. Inevitably, we will see hundreds of regulators issuing thousands of regulations all looking to tackle the same thing – climate risk.

It is good to see that OSFI have vowed to consider both international and Canadian developments when creating climate-risk guidance. But it begs a much broader question – why are we not working to create a global regulatory standard for ESG?

CUBE’s next-generation AI scans the entire regulatory internet to capture every piece of regulatory content. We use RegTransform to essentially break that regulatory content down to its lowest common denominator and build it back up again, in a way that is standardised, translated into English, with a unified morphology and tags that are consistent regardless of regulator, regulation, or jurisdiction. We then present it to our customers in a single and easily navigable regulatory inventory. All of this is intelligently automated and done in real time, continuously. (We also do a lot of other cool things, such as making sure the content is highly relevant and mapped to their specific controls – but I won’t go into that here, you can see more on our product page).

Imagine though that process didn’t have to exist. That instead of having an incredibly disconnected and complex regulatory environment, regulators worked together to create a unified, international global standard. Of course, getting consensus would be almost impossible, but imagine how much easier the compliance officer’s job would be!

This may seem like a pipe dream, but there is no denying that the messaging from regulators and the regulated points to a growing desire for standards. In the meantime, there’s CUBE.

If you want to make sense ofemerging and in-force global regulatory obligations for ESG, CUBE has you covered.