Opening remarks by Ben Gully on the final report for the pilot project on climate risk scenarios

We view the pilot as a success. Climate scenario exercises, like this one, make clear the potential impacts of transition risks across a range of different climate pathways. They also help build risk management capability and awareness among the participating institutions. While this exercise focused exclusively on transition risk, an assessment of the physical risks associated with climate change will be the focus of future work.

Scenario analysis is a thought-provoking activity that provides a flexible “what-if” framework to explore how risks may evolve in the future. As such, this exercise served as an opportunity to challenge “business as usual assumptions” through critical strategic thinking and the use of different underlying assumptions about the path to transition.

Further, we took this opportunity to better understand the governance and risk management practices of participating institutions, and the level of preparedness for the analysis of climate-related risks. We found that financial institutions are generally in the early stages of building risk assessment capabilities for transition risks, including the use of climate scenario analysis to measure risk. We intend to engage more institutions in scenario analysis moving forward to build greater risk management capability at institutions over time. OSFI will also release a draft guideline on climate risk management for consultation later this year.

We also found that meaningful disclosures matter. Improving disclosures helps financial system stakeholders respond to clear, comparable, and consistent information about climate-related risks and opportunities. We know that international efforts to reach a consensus on a global sustainability reporting framework, and an acceptable Canadian-specific standard, will take time. OSFI will assess market readiness for mandatory climate-related financial disclosures aligned with the TCFD, including identifying barriers, opportunities, and overall market impact related to broad adoption, especially for smaller non-publicly traded financial institutions.

The results of the pilot are not meant to be a forecast or prediction, but they should serve to foster a discussion and a better understanding of the impacts of climate change on existing business models.

Overall, we found that the potential cost of delayed policy actions supports the urgency of our work on climate-related risks to ensure that the financial system is resilient to a range of severe but plausible transition pathways. This means for the near term we will be focused on promoting sound risk management at regulated entities. The question of whether financial institutions should hold extra capital to cover the financial risks stemming from climate transition will depend on the effectiveness of risk management. It is precisely this work on risk management that will inform the capital build-up necessary to sustain financial system resilience into the 2030s.

The Bank and OSFI remain committed to better understanding and assessing climate-related risks to the Canadian economy and financial system, and to supporting financial institutions in building their capacity for climate-related risk assessment and management. OSFI is also aware that adaptation costs will not fall evenly across the country and we have a duty to understand the impacts on local economies. This means that we will ultimately deliver an agile regulatory response for financial institutions in a manner that recognizes the existence of outcome asymmetries and seeks to minimize them.

With that, I am happy to take your questions.