Mar 30, 2023

B-15 climate risk management: What financial institutions in Canada need to know

Risk | by Cal Inman, CEO | 4 Minutes

B-15 is a new guideline issued by Canada’s Office of the Superintendent of Financial Institutions (OSFI) that directs how federally-regulated financial institutions should assess, manage and disclose climate-related risks. The guideline, issued in March 2023, aims to help Canadian financial institutions build resiliency in the face of climate-related hazards. It addresses both physical and transition-related climate risks.

B-15 includes different timelines for implementation of disclosure requirements, depending on the size and type of institution or insurer. Certain financial institutions are expected to implement these disclosure expectations as early as 2024. Banks and financial institutions overseen by provincial regulators may follow other guidelines similar to B-15.

Understanding Canada OSFI Guideline B-15

Guideline B-15 is divided into two main parts or chapters. The first part lays out expectations for financial institutions’ structure and risk management practices, and the second part covers expectations for climate-related financial disclosure.

Chapter 1: Governance and risk management expectations

The first section of the guideline outlines five key principles for federally regulated financial institutions (FRFIs) to assess and monitor climate-related risks. They are:

  • Principle 1: Create an appropriate governance and accountability structure for managing climate-related risks.
  • Principle 2: Incorporate both physical and transition risks in the FRFI’s business model and strategy.
  • Principle 3: “Manage and mitigate climate-related risks in accordance with the FRFI’s Risk Appetite Framework.”
  • Principle 4: “Use climate scenario analysis to assess the impact of climate-related risks on [the FRFI’s] risk profile, business strategy, and business model.”
  • Principle 5: “Maintain sufficient capital and liquidity buffers for … climate-related risks.”

B-15  recommends that firms use risk measurement methodologies and address data gaps in assessing risk. Where data is lacking, the guidelines urge companies to consider using “alternative data sources or reasonable proxies to bridge the gap.” 

Chapter 2: Climate-related financial disclosures

Companies should disclose information “specific to the current and potential future impact of climate-related risks and opportunities on its markets, businesses, corporate or investment strategy, financial statements and reports, and future cash flows,”according to the B-15 guideline.

The guideline says that disclosure will protect policyholders, creditors and depositors, as well as increase public trust in Canadian financial institutions.

What are climate risks for Canadian banks & lenders?

Climate-related risk can impact banks and lenders in a variety of ways. The 10 biggest climate-driven disasters of 2021 together cost $170 billion in damages — a number that could swell to trillions in the future. Events ranging from flood to fire to major heat waves to extreme cold snaps can all impact property and investments. A firm’s specific risks may depend on the specific regions where it does business.

Understanding different categories of risk is increasingly important as regulatory bodies issue guidelines and requirements for financial institutions, and as the costs of climate change mount. Here are some areas of risk firms should consider.

Climate risk to credit

Banks often provide loans that are collateralised against property, and shoulder risk if that property gets damaged by climate-related hazards such as floods and wildfires. As climate-driven events escalate in intensity, banks and lenders will see more collateral susceptible to damage and loss.

Climate risk to property value

Damage to property, shifting perceptions of risk, and economic disruptions due to climate change can cause property values to fall, contributing to market risk. Increased awareness of climate change and availability of high-level risk data also means that consumers are able to make more informed decisions about their properties, affecting market sentiment.

Climate impact on insurance costs

Financial institutions also have to contend with insurance risk in the face of climate change. The increased frequency and intensity of climate events places a greater burden on real estate properties and can drive up costs in the property insurance market. Banks have a stake in ensuring that properties are insured for the appropriate climate risk and may have to contend with rising costs.

Operational risks of climate change

Like any business with physical locations, financial institutions also may bear operational risks caused by interruptions in service and outages due to climate hazards. Property loss and damage could make it more difficult for businesses to recover after a major climate event and affect public trust in the company.

Using data to manage climate risk

The B-15 guidelines underscore the importance of continuously monitoring climate-related risks. Visibility into risk starts with accessing the right data. Banks and lenders can use data to identify specific climate-related risks to real estate assets, and understand how risk is distributed across a bundle of properties.

ClimateCheck assesses physical climate risk to individual properties and across portfolios. We offer data from high-level regional levels, down to individual parcels, and everything in between. Our team of experts uses data from government, academic and other public and institutional sources, such as the Intergovernmental Panel on Climate Change (IPCC) to rank drought, heat, fire, flood, and storm risk. Clients of ClimateCheck include Local Logic, ERIS, Morningstar Inc, and more.

As regulators in Canada and the US put out guidelines like B-15 and consider policies such as mandating climate risk disclosures, businesses and financial institutions face growing pressure to monitor climate risk. But keeping pace with regulators is just one reason to monitor risk. An even more compelling motivation is your firm’s bottom line. When you don’t prepare your assets and portfolio for climate change, you risk financial losses and costly liabilities.

Looking to incorporate climate into your risk assessments?