The Office of the Superintendent of Financial Institutions (OSFI) has announced the issuance of a Phase 2 consultation on a Climate Scenario Exercise for banks. According to the announcement, the exercise will involve various components including impact assessments on credit and market risks for commercial exposures, as well as evaluations of real estate and physical risk exposures.
OSFI stated, "The final versions of these documents as well as a questionnaire (SCSE Questionnaire) will be released in late 2024." The regulator highlighted the importance of completing standardized climate scenario exercises as outlined in Guideline B-15 on climate risk management, published in March 2023.
Institutions participating in the exercise are expected to follow a top-down approach defined by OSFI, while also conducting their own bottom-up assessments. The exercise will encompass different climate transition scenarios, including "Below 2℃ immediate," "Below 2℃ delayed," and "Net-zero 2050 (1.5℃)."
OSFI has utilized scenario data developed by the Network for the Greening of the Financial System (NGFS) and the Bank of Canada to customize scenarios for the Canadian economy. Financial institutions will be required to forecast baseline probability of default and loss given default until 2050 to assess transition risks, as well as provide granular data on real estate exposures and geolocation of properties for physical risk evaluations.
Institutions have been encouraged to commence work on the SCSE, with finalized sections on methodology and instructions. The remaining sections focus on industry and regional sector classifications for transition risks, as well as geocoding and regional scope for physical risks.
The consultation by OSFI underscores the increasing importance of climate risk management in the financial sector and aims to equip regulated institutions with the necessary tools to assess and mitigate climate-related risks efficiently.
For more information and resources related to climate and ESG risk assessment processes, interested parties are directed to visit Moody's Analytics Climate and ESG Risk Microsite.
