What We Heard: Consultations on Draft Climate Risk Returns

Key Themes – all FRFIs

Filing Timelines & Alignment with Guideline B-15

FRFIs recommended that OSFI align the filing date of the Climate Risk Returns with the reporting deadline of Guideline B-15 expectations, i.e., 180 days after fiscal-year end.

Similarly, FRFIs requested that the implementation date of the Climate Risk Returns be aligned with the effective date of Guideline B-15, where financed emissions disclosures are required one year later (i.e., fiscal year-end 2025 for DSIBs/IAIGs and fiscal year 2026 for SMSBs/non-IAIGs).

Key Themes – DTIs

The following key themes emerged from the feedback provided by DTIs.

Scope 3 GHG Emissions and PCAF Methodologies

DTIs indicated that financed emissions data will be volatile for several years following the implementation of the Climate Risk Returns as greenhouse gas (GHG) emissions data is available with a time lag of 1–2-years because of the lengthy process of collecting and verifying emissions data from various sources including counterparties. As such, alignment of the GHG emissions data filing periods with financial reporting periods is not presently feasible.

Furthermore, DTIs recommended that OSFI offer flexibility regarding frameworks or standards for calculating Scope 3 GHG emissions. For asset classes where Partnership for Carbon Accounting Financials (PCAF) methodologies do not currently exist, DTIs suggested a “phase-in” of additional requirements over time for the Climate Risk Returns.

Geographic Granularity - Asset Classes, FSA, and Weighted Average PD and LGD

DTIs indicated that the data requested in the draft returns were too granular and could cause operational challenges for FRFIs, especially for Small and Medium Size Banks (SMSBs) with limited resources. In this context, DTIs suggested that OSFI consider eliminating unsecured retail lending asset classes due to the complexity in assessing physical climate risk impacts on retail borrowers.

Additionally, DTIs expressed concern with the challenges associated with the FSA (Forward Sortation Area) level of reporting for physical risk exposures and credit risk metrics in Canada and abroad and requested that this data be reported on an aggregate basis at the country level (i.e., Canada, U.S., and Other).

Similarly, DTIs stated that it would be difficult to provide FSA level granularity for IFRS 9 Probability of default (PD) and Loss Given Default (LGD) metrics for the specified asset categories in the draft returns. Industry representatives requested that DTIs applying the advanced internal rating based (AIRB) approach to credit risk provide PD and LGD data, respectively, while DTIs not applying the AIRB approach under Basel receive an exemption from providing any PD and LGD data.

Key Themes - Insurers

The following key themes emerged from the feedback provided by insurers.

Standardizing Return Definitions of Perils

Insurers urged OSFI to provide greater clarity on perils definitions (e.g., “Water”, “Convective Wind” and “Other climate change-driven perils”) and suggested aligning perils definitions to industry standards to avoid ambiguity and misinterpretation. Insurers also recommended that OSFI use consistent terminology (e.g., “climate change-related perils”, “climate change-driven perils”, “climate change-driven”) in the returns’ instructions.

Scope 3 GHG Emissions and PCAF Methodologies

Insurers stated that reporting Scope 3 GHG emissions data would be challenging due to limited internal resources particularly for smaller institutions. Concerns about data availability, data quality issues, and as well as a lack of standardized methodologies for certain asset classes were also raised by the industry. Finally, insurers requested that OSFI allow reasonable timelines for the new standards to be implemented before requiring filing.

Geographic Granularity – Reinsurance Recoveries and PMLs

Insurers proposed that OSFI reassess the geographic level of granularity required by the returns. Specifically, insurers expressed concern with the Forward Sortation Area (FSA) level reporting for some data elements (e.g., Paid Claims, Scope 3 GHG emissions, Reinsurance Recoveries) due to potential operational challenges given insurers’ internal systems have not been designed to collect information at the level of granularity requested by the returns.

Non-applicability of Physical Risk Returns to Life and Health Insurers

Insurers highlighted the need for additional clarity in the returns’ instructions to distinguish reporting requirements for Life and Health Insurers, Mortgage Insurers and Reinsurers.

Cross-industry Themes - All FRFIs (DTIs and Insurers)

Scope of Filing and Implementation Dates

Feedback

Respondents suggested that OSFI align both the reporting and implementation dates of the Climate Risk Returns (CRRs) with the reporting and effective dates of Guideline B-15 disclosures. Respondents were also of the view that OSFI should apply proportionality based on FRFI size and available resources.

OSFI Response

OSFI agrees. The reporting and effective dates for the Returns will be aligned with those of Guideline B-15. Specifically, and by way of proportionality:

• DSIBs /IAIGs: depending on the FRFI’s fiscal year- end date, filing of the return will initiate by mid-2025 (180 days after fiscal year-end)
• For SMSBs/non-IAIGs: depending on the FRFI’s fiscal year- end date, filing of the return will initiate by mid-2026 (180 days after fiscal year-end)

Scope 3 GHG Emissions and PCAF Methodologies

Feedback

Respondents asked for OSFI to account for gaps in the available PCAF reporting methodologies for certain asset classes included in the returns.

OSFI Response

OSFI agrees and FRFIs will be required to report only those asset classes for which PCAF methodologies for calculating GHG emissions are available with an option to “phase-in” additional requirements over time. OSFI will offer flexibility to FRFIs to report GHG emissions with a one-year lag.

Geographic Granularity

Feedback

Respondents requested that OSFI re-evaluate the level of granularity and coverage of the returns at the FSA level for certain asset classes and metrics.

OSFI Response

OSFI agrees and FRFIs will be required to report certain asset classes and metrics at the provincial or national level. However, FSA-level information will be expected of FRFIs in OSFI’s next iteration of the returns. As such, OSFI encourages FRFIs to start building the necessary capability to measure, monitor and assess climate-related financial risks at the necessary level of granularity.

Sector-specific Themes - Deposit Taking Institutions

Asset Classes

Feedback

Respondents requested that OSFI not require data related to the unsecured retail lending asset classes (i.e., Credit Card, Line of Credit, Other Retail excl. SME) from the Physical Risk Returns due to the complexity in assessing physical climate risk impacts on retail borrowers.

OSFI Response

OSFI disagrees and will require data related to unsecured lending products as these could be impacted by physical risks (e.g., floods) and the transition to a low-carbon economy could have negative financial consequences for some economic sectors (e.g., fossil fuels).

Weighted Average PD and LGD

Feedback

Respondents requested that DTIs applying the IRB approach report regulatory capital PD and LGD, while DTIs using the standardize approach be exempt from providing any PD and LGD data.

OSFI Response

OSFI agrees and will require IRB banks to use regulatory models for credit risk metrics. However, OSFI disagrees with banks using the standardized approach to credit risk not providing any metrics, as they already use IFRS 9 and would have the associated credit metrics. As such, banks using the standardized approach to credit risk will be required to report IFRS9 PD and LGD metrics.

Sector-specific Themes - Insurance Sector

FRFI – P&C Insurers, Mortgage Insurers, Reinsurers and Life Insurers

Standardizing Return Definitions of Perils

Feedback

Respondents highlighted that perils definitions provided in the draft Returns were not aligned with catastrophe models available in Canada.

OSFI Response 

OSFI agrees and have aligned our perils definitions to the definitions of modeled perils from major catastrophe model vendors.

PML and Catastrophe Models

Feedback

Respondents recommended that OSFI only require reporting on Probable Maximum Losses (PMLs) on a national basis and re-evaluate requirement after multiple years of reporting.

OSFI Response 

OSFI agrees and insurers will be required to report PMLs at the national level from both internal and third-party catastrophe models.

Applicability of the Returns to Mortgage Insurers, Reinsurers and Life Insurers

Feedback

Respondents requested that OSFI provide more detailed explanations regarding the purpose of the data collection. Respondents also suggested that OSFI also consider the overall usefulness of the information that is proposed to be collected from reinsurers.

Finally, other respondents highlighted that certain sections within the Returns do not apply to mortgage, and life and health insurers.

OSFI Response 

OSFI agrees and has updated the returns’ instructions to include the purpose of the data collection. OSFI has also clarified the reporting requirements for the IC1-Physical Risk return as follows:

• Filing is optional for Reinsurers
• Filing is not required of Mortgage Insurers
• Filing is not required of Life and Health Insurers