As a leading indicator of the nation’s fiscal priorities, the release of Canada’s Federal budget is an event heavily anticipated by financial markets. In the latest 2022 budget release, the Canadian federal government announced spend towards implementing climate-related disclosure requirements and risk management expectations for Federally Regulated Financial Institutions (FRFI). These disclosure requirements and governance expectations, aligned with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD), are expected to come into effect by 2024. The release of The Office of the Superintendent of Financial Institutions’(OSFI) Climate Risk Management guidelines is the first material action made by Canada that officially brings Environmental, Social and Governance (ESG) considerations into its financial markets. While FRFIs within Canada should evaluate how they will comply with these impending regulations, non-FRFIs, such as asset managers, should proactively prepare for similar regulatory action. This strategy will ensure asset managers are able to efficiently manage climate-related risks and establish transparent relationships with relevant stakeholders, as called for by the Canadian Government.
Governance and Risk Management guidelines are the first proponent of the OSFI’s proposed regulation and includes Climate Scenario Analysis & Stress Testing as well as Capital & Liquidity Adequacy principles. FRFIs will be expected to comply with the following 6 principles:
- Principle 1: Incorporate implications of climate change and the transition to a low greenhouse gas (GHG) economy into business model & strategy
- Principle 2: Maintain appropriate governance, policies, & practices to manage climate-related risks
- Principle 3: Adopt processes to adequately price climate-sensitive assets and liabilities and manage these exposures in accordance with the FRFI’s Risk Appetite Framework
- Principle 4: Mitigate the impact of climate-related disasters on its critical operations
- Principle 5: Implement climate-related scenario analysis to assess the impact of climate-related risk drivers on its risk profile, business strategy, and business model
- Principle 6: Maintain sufficient capital & liquidity buffers for its climate-related risks
The OFSI will be reinforcing its climate risk management expectations through climate-related financial disclosure expectations. Annual climate-related financial disclosures will provide visibility on FRFIs’ financial condition and the risks they are exposed to. This transparency will ultimately protect depositors, creditors, and policyholders, as well as attract investors, analysts, and the public at large.
To ensure effective management of climate-related disclosures, the OFSI have proposed the following set of principles:
- Principle 1: The FRFI should disclose relevant information
- Principle 2: The FRFI should disclose specific and complete information
- Principle 3: The FRFI should disclose clear, balanced, and understandable information
- Principle 4: The FRFI should disclose reliable, verifiable, and objective information
- Principle 5: The FRFI should disclose information appropriate for its size, nature, and complexity
- Principle 6: The FRFI should disclose information consistently over time
Despite the first wave of ESG regulation directly applying to only FRFIs, non-FRFIs such as asset and wealth managers should prepare for the reach of regulators into the wider Canadian financial markets. Future ESG regulation will force asset and wealth managers to invest in reporting systems supported by high quality ESG data to ensure regulatory compliance and the maintenance of transparent relationships with stakeholders. In addition, asset and wealth managers will have to prepare client servicing teams for engagement with client questions on topics such as regulatory impacts to their portfolios and overall product offerings. Ultimately, investment teams will be driven to determine how they will make marked improvements on their portfolios while still generating alpha. Proposed FRFI ESG regulation not only encourages asset managers to develop ‘best-practice’ risk management and client reporting models, but also provides a glimpse of what future regulation will look like. To adopt these best practices and prepare for direct regulation, asset and wealth managers must consider several key questions regarding their reporting and governance capabilities:
- How can client reporting be scaled up and eventually automated to support increasing disclosure requirements?
- What operational changes will be required across the organization and what new data will need to be captured, analyzed, and reported on?
- How can you ensure data integrity is built into your data sourcing and the development of your core tools?
- What organizational changes will be required to support new governance models?
- How can control processes be enhanced to ensure resilience through climate risk scenarios or disasters?
Alpha FMC has deep experience defining both client and regulatory reporting models for asset managers & asset owners in compliance with TCFD and other global ESG standards. For more information on how Alpha can assist your firm, please contact us.
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About the Authors
Brian Helmes
Senior Manager
Brian is a Boston-based Senior Manager in Alpha FMC North America with over 15 years of diverse experience in financial services and consulting built over numerous years in industry and subsequent consulting engagements at leading global asset managers and government institutions. Brian also co-leads ESG research and advisory efforts for North America.
Matthew Hooker
Consultant
Matt is a Boston-based Consultant in Alpha FMC North America with a breadth of experience supporting investment managers, ranging from implementing ESG analytics solutions to performing complex operational transformations. Matt supports ESG research and advisory efforts for North America.
Rebecca Dunkelman
Analyst
Rebecca is a Toronto-based Analyst in Alpha FMC North America. Rebecca has a breadth of experience supporting investment managers across a variety of engagements within the Distribution and M&A practice areas. Rebecca supports ESG research and advisory efforts for North America.