15 April 2024

OSFI Updates Guideline For Federal Financial Institutions On Climate Risk Management And Disclosure

McCarthy Tétrault LLP


McCarthy Tétrault LLP provides a broad range of legal services, advising on large and complex assignments for Canadian and international interests. The firm has substantial presence in Canada’s major commercial centres and in New York City, US and London, UK.
The Office of the Superintendent of Financial Institutions ("OSFI") recently released an updated version of Guideline B-15: Climate Risk Management (the "Guideline").
Canada Wealth Management
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The Office of the Superintendent of Financial Institutions ("OSFI") recently released an updated version of Guideline B-15: Climate Risk Management (the "Guideline"). In particular, OSFI updated Annex 2-2 to the Guideline, Minimum Mandatory Climate-related Financial Disclosure Expectations ("Annex 2-2"). The updated Guideline seeks to align its climate-related disclosure framework with the International Sustainability Standards Board ("ISSB") standard, IFRS S2 Climate-related Disclosures ("IFRS S2"), by incorporating several of IFRS S2's key elements.

Our review of IFRS S2 and its companion sustainability disclosure standard, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and our analysis of the initial version of Guideline can be found here and here, respectively.

General Updates to the Guideline

OSFI updated the main body of the Guideline with two notable changes in addition to revisions to Annex 2-2. First, the Guideline now includes the expectation that federally regulated financial institutions ("FRFIs") will make comparative period amounts disclosures. These disclosures must begin with the reporting period following implementation as set out in Annex 2-2. FRFIs should also include narrative information to accompany comparative amount disclosure, to the extent useful to understand this disclosure.

The second update concerns the Guideline's scope of application for FRFIs with parent companies that do not report to OSFI. The Guideline now allows for references by a FRFI to its non-FRFI parent-level or group-level disclosures for common elements. Previously, the Guideline only permitted FRFIs with non-FRFI parents to only reference group level disclosures, and required supplemental FRFI-specific information.

Updates to Annex 2-2 and its Role in the Guideline

Annex 2-2 is an integral component of Guideline, setting out baseline disclosure expectations for different categories of FRFIs as well as a timeline for implementation.

Annex 2-2 organizes OSFI's disclosure expectations into four principal categories, mirroring the core content of IFRS S2: Governance, Strategy, Risk Management, and Metrics and Targets. These four categories will be familiar to FRFIs that voluntarily prepare reports aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures ("TCFD"), which introduced these climate disclosure pillars.

For each category, OSFI prescribes distinct climate-related disclosure for FRFIs. The update to Annex 2-2 introduces greater precision and depth to these expectations. An overview of each category and the relevant updates to Annex 2-2 follows.

i. Governance

The updated Governance section expands expected disclosure of the FRFI personnel involved in managing a FRFI's climate-related risks and opportunities, moving below the FRFI's board of directors to also include governance bodies, committees or individuals responsible for oversight of climate-related risks and opportunities. The disclosure must include details concerning the specific expertise, responsibilities, process around staying informed, oversight of strategy, major transactions, target setting and monitoring progress toward targets of these bodies, committees or individuals and how climate considerations are factored into their compensation.

More specific disclosure obligations on the role of the management of the FRFI have been included, with an emphasis on the identification of key management positions or committees, along with the nature of their oversight and their roles in monitoring the FRFI's climate-related risks and opportunities.

ii. Strategy

OSFI's expectations on what climate-related risks and opportunities the FRFI must identify is more sharply focused in the Guideline. An FRFI is expected to disclose only those risks and opportunities which could reasonably be expected to affect its cash flows, access to finance or cost of capital. Each risk must be classified as either a physical or transition risk. The FRFI must also sort each risk and opportunity as either short, medium or long term and define each of these timeframes.

The Strategy section also adds specific disclosure requirements for the impact of climate risks and opportunities on the FRFI's business model and value chain, strategy and decision-making, financial position, financial performance, and cash flows. Specifically, an FRFI is required to disclose information on current and anticipated changes to the FRFI's business model, including resource allocation, to address climate-related risks and opportunities and direct and indirect mitigation and adaption efforts. In preparing this disclosure, the Guideline provides that an FRFI should use all reasonable and supportable information that is available to it at the reporting date without undue cost or effort. The FRFI should also provide both quantitative and qualitative information, subject to exceptions: (i) non- D-SIBs and Non-IAIGs need not disclose quantitative information on cash flows (ii) an FRFI need not disclosure quantitative information on financial effects if those effects are not separately identifiable or the level of measurement uncertainty is so high that the quantitative information would not be useful and (iii) an FRFI need not disclose quantitative information on anticipated effects of climate-related risks and opportunities if the FRFI does not have the skills, capabilities, or resources to do so.

iii. Risk Management

The update to the Risk Management category shifts from requiring that FRFIs "describe" their risk management practices to instead requiring that they "disclose information about" various aspects of risk management. This change suggests that OSFI anticipates robust information to support FRFIs' risk management efforts. The management of climate-related risk is now also framed in the Guideline as a systematic four-step process, encompassing the identification, assessment, prioritization, and monitoring of climate-related risks.

iv. Metrics and Targets

A number of notable updates were made to the Metrics and Targets category to Annex 2-2 including:

  • Annex 2-2 now calls for the disclosure of location-based absolute Scope 2 greenhouse gas ("GHG") emissions. This is a shift from the annex's former requirements for absolute Scope 2 GHG emission disclosures which were not location-based.
  • While retaining an obligation for FRFIs' to report their approach to measuring Scope 1 and Scope 2 GHG emissions, the Guideline now also requires disclosure of inputs and assumptions in measuring these GHG emissions and the underlying reasons for these decisions.
  • Guidance on Scope 3 GHG emissions has been expanded with additional detail providing clearer definitions, more explicit disclosure requirements, and sector-specific instructions. In particular, FRFIs should consider each of the 15 categories of Scope 3 GHG emissions[1] and, in particular, ensure the inclusion of emissions for Category 15: Investments. Depending on a FRFI's operations, this category could include emissions relating to loans and investments (financed emissions), asset management activities (AUM) and P&C insurance underwriting portfolios.
  • Expectations relating to cross-industry metrics are now set out in detail covering expected disclosure on specific metrics relating to climate-related transition risks, physical risks, opportunities, capital allocations, internal carbon pricing, and remuneration strategies. For the disclosure of cross-industry metrics for climate-related transition risks in particular, FRFIs should utilize all available, reasonable, and supportable data without incurring excessive costs or effort. Both quantitative and qualitative details should be provided, with some exceptions.
  • Disclosure of climate-related targets by outlining the objectives, timeframes, and baseline periods for each target, as well as any revisions made to these targets. Additionally, FRFIs must also detail the methods they use in order to monitor progress and provide a performance analysis against these targets.

Implementation Timeline for the Guideline

In addition to the substantive revisions to Annex 2-2, OSFI has now specified its expected timelines for the implementation of two disclosure elements: (1) cross-industry metrics and (2) industry-based metrics (both under the Metrics and Targets category). Previously marked as "TBD", both of these disclosure expectations are now expected for fiscal year-ends 2025 or 2026, as determined by a FRFI's categorization.

Two disclosure expectations in Annex 2-2 still have unsettled timelines: climate transition plans and resilience of strategy (both under the Strategy category).

McCarthy Tétrault's Expertise

By leveraging our deep industry expertise, we help our clients navigate Canada's complex, highly regulated financial institutions environment to achieve their business goals, including those engaging the evolving and dynamic environmental, social and governance ("ESG") and sustainability landscape. Please contact a member of our Financial Institutions Regulatory Matters group or ESG and Sustainability strategic issues group if you have any questions or for assistance.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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