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OSFI's new Guidelines on Climate Risk Management
Blog...OSFI's new Guidelines on Climate Risk Management

OSFI's new Guidelines on Climate Risk Management

Legislation & Standards
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What is OSFI, or the Office of the Superintendent of Financial Institutions, and how will the new guidelines released by OSFI on climate risk management help OSFI to continue curating a trustworthy financial industry for Canadians?
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Financial accountability is becoming increasingly important as sustainability continues to skyrocket in this new era of greater awareness regarding the impact of business endeavors on the climate – and OSFI is just one of the many organizations to take note of this. 

What is OSFI, otherwise known as the Office of the Superintendent of Financial Institutions, and how will the new guidelines on climate risk management released by OSFI help OSFI to continue achieving their goal of curating a trustworthy financial industry for Canadians?

What is OSFI?

OSFI, or the Office of the Superintendent of Financial Institutions, is an individual agency part of the Canadian Government which is responsible for relaying information back to the Minister of Finance in order to cultivate greater transparency and trust in Canada’s financial system. 

OSFI was established in 1987 with plans to aid in creating a safe and secure environment for Canadians to contribute to their own country’s financial system. OSFI accomplishes this by monitoring and regulating banks and insurers registered under Canada’s federal government, loan institutions, companies that give out trust funds, and also by overseeing private pension plans. 

If the Canadian government is able to curate a fully functioning financial sector, it enables Canadians to gain confidence in their federal financial system – which ultimately can help to allow the country’s financial endeavors to be more successful, as well as help to boost Canada’s economy. 

“Think of someone trying to pass their driver’s test, but the person has no confidence in their ability to drive or knowledge on the rules of the road. Even if the person is able to drive well, they may not be successful in their driver’s test as they lack the confidence to trust themselves to pass with flying colors. OSFI seeks to eliminate the fear of distrust for Canadians and their financial institutions in order to ensure financial success is met upon all Canadian citizens.” 

How does OSFI work to ensure financial security amongst Canadian citizens?

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What are the main goals of OSFI?

The OSFI has many policies in place in order to achieve their main goals. 

One of the main goals of OSFI is to encourage the implementation of safer policies and protocols throughout financial institutions in Canada in order to better manage and control financial risks across the country. Ultimately, OSFI creates more trustworthy financial activities that will both help Canada’s economy to excel while also providing safe financial activities for Canadians.    

Additional goals of OSFI include to create a competitive financial market, cultivate financial sustainability, and develop improved international standards in conjunction with Canada’s market realities. 

For instance, OSFI permits financial institutions to implement risks into their financial models in order to evaluate later their effectiveness in creating an economically viable, yet trustworthy, financial activity. This allows OSFI to evaluate the effectiveness of said financial institution, and be able to implement new and improved policies later. In a sense, OSFI allows risks in financial endeavors as a trial-and-error mechanism to use as a data point to curate better financial services in the future. 

Toronto skyline

How does OSFI work?

While OSFI does have a big say in the financial activities to be conducted amongst Canadian financial institutions – it does not oversee or have complete jurisdiction over private pension plans or the daily activities of financial institutions. 

“Think of OSFI like a teacher or a guidebook: OSFI is there to monitor and suggest action, but it is ultimately up to the directors and board of management of said financial institution to implement the appropriate risk management techniques provided or suggested by OSFI.”

In addition to this, OSFI also doesn’t have control over predicaments related to the consumer or issues a part of the securities industry. OSFI ultimately works to monitor and guide financial institutions to ensure they are complying with the current financial mandates in place, which is done by altering the directors and the board of management at a financial institution of the current policies. OSFI also monitors the current financial standings of a business by remaining aware of its impact on its surroundings, executing on-site reviews to see the activities of these financial institutions in person, and seeking to advise the changes necessary in a timely manner to avoid the consequences of financial risks taken by financial institutions. 

👉OSFI’s is funded through a combination of allocated costs  provided from the Canadian government, and through compensation for conducting assessments on various financial institutions regulated by OSFI. 

OSFI provides guidelines for financial institutions regulated by the federal government, or FRFIs, with transparency and collaboration in mind. OSFI seeks the assistance of both domestic and international agencies which seek to set standards for various financial activities, and in doing so – OSFI curates the most viable guidelines for financial institutions across Canada.

What are the new guidelines on climate risk management provided by OSFI?

OSFI has recently released new guidelines on climate risk management as of March 2023 in order to adhere to the threat of climate change on the financial industry.

The new guidelines on climate risk management released by OSFI, officially named as Guideline B-15: Climate Risk Management, serves as their first framework that is specifically garnered towards the impact of climate change on the activities of financial institutions in Canada. Currently, the new guidelines on climate risk management are composed of two separate chapters – a chapter on Governance, and a chapter on Financial Disclosures. The chapter on Governance aims to clarify how monitoring risks and risk management should be conducted for continued success amongst OSFI in the midst of climate change, while the chapter on Financial Disclosures delineates how climate-related financial risks should be addressed and disclosed to instill greater confidence and transparency in Canadian financial endeavors and the country’s economy. 

Ultimately, the main goal of Guideline B-15: Climate Risk Management is to help federally regulated financial institutions, or FRFIs, to build greater transparency, accountability, and resilience against the impacts of climate change on the financial industry in addition to providing better resources to ensure that financial institutions of all sizes and differing operations can implement better climate risk management tactics. 

The new Guideline B-15 for climate risk management by OSFI includes some of the most descriptive guidance by OSFI thus far, as the guideline was curated with the help of over 4,000 submissions from various federally regulated financial institutions – like a peer review. The most imperative feedback taken into consideration from FRFIs included how to approach climate-related risks in financial activities and reporting, how to properly conduct financial disclosures, bearing in mind the various sizes and efforts of various financial institutions, and the liquidity requirements currently in place.

Guideline B-15 by OSFI will be implemented by the end of 2024’s fiscal calendar year for both domestic banks and international insurance groups that are headquartered in Canada, whereas all other qualifying FRFIs will be subject to adhere to these new guidelines on climate risk management by the end of 2025. 

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What is an example of OSFI’s new climate risk management guidelines being implemented?

OSFI has already taken their new guidelines on climate risk management with the recent Silicon Valley incident, where Canada officials overtook the operations of a tech lender part of the Silicon Valley Bank in order to prevent a massive baking predicament. The Silicon Valley Bank, which served as a financial resource for many companies in the tech industry, fell apart in under 48 hours. 

This depicts the governance chapter of the new climate risk management framework released by OSFI, as pulling the plug on shared business operations with this bank will ultimately help to save Canada’s economy. For reference, banks in Canada suffered from a 2.3% decline in investments and stock rises in addition to some Canadian banks suffering from a near $20 billion drop in value in only a week.  

One of the goals of Guideline B-15 for climate risk management is to ensure the safety and viability of Canada’s economy, and OSFI’s interference in removing Canada’s assets in Silicon Valley’s Bank is a perfect example of OSFI exercising the protocols presented in their new guidelines for climate risk management. Canada is not the only country to pull out equity or investments from the Silicon Valley Bank – with many entities from the U.S. and Asia doing the same following the collapse of the Silicon Valley Bank.

👉OSFI removing Canada’s assets from the Silicon Valley Bank depict how Guideline B-15: Climate Risk Management will recognise when risks are too high to remain partnered with a financial organization, and how OSFI and their new guideline on climate risk will work to avoid financial havoc on Canadians.

Canadian citizen

How will the new climate risk management guidelines released by OSFI help OSFI to be successful?

OSFI has already been successful in guiding financial institutions across Canada in managing risks and financial disclosures, but the new guidelines on climate risk management will help OSFI to manage and make new suggestions for FRFIs even more so than before. This is because climate change has altered the way that many investments are being made, such as with ESG funds, impact investing, and socially responsible investing. 

Finance has completely changed due to climate change, therefore – an adjustment to how organizations such as OSFI seek to protect both financial assets and the economy of their respective country as a result of climate change is becoming a necessity. Climate change could impact the success of various funds and economic activities, meaning that ultimately – OSFI will be better equipped to handle the financial predicaments that many financial institutions will start to suffer from in the midst of climate change.

What about Greenly? 

If reading this article about the OSFI’s new guidelines on climate risk management has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

The new guidelines on climate risk management released on behalf of the OSFI are just some of the many environmental policies and pieces of climate legislation being developed and proposed in order to combat climate change. Check out our legislation tracker here to see which rules your company has to adhere to.

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

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