Federal financial regulators set out plans for banks and insurers to sketch out their exposures to climate change under various potential scenarios.
The Office of the Superintendent of Financial Institutions’ (OSFI) draft methodology for a standardized climate scenario exercise (SCSE) is intended to help both financial institutions and regulators understand the sector’s climate-related risks.
“The adoption of sound climate risk management practices at financial institutions will give OSFI confidence that those institutions have the necessary policies and procedures in place to manage financial risks,” said Peter Routledge, superintendent of financial institutions, in a release.
Rather than trying to quantify climate-related risks under different scenarios, the initial exercise aims to examine the differences in exposure between firms.
“While absolute risks can be hard to measure, OSFI believes that risk discrimination between counterparties, industries, and even [financial firms] is achievable, even utilizing relatively less sophisticated approaches and modeling methodologies,” the draft said.
The exercise aims to raise awareness and improve firms’ understanding of their potential exposures to climate change, establish a standardized quantitative assessment of climate-related risks, and build financial institutions’ capacity to assess the impact of climate-related catastrophic events and policies and conduct their own internal scenario analysis exercises.
“These exercises will enable OSFI to assess aggregate exposures to physical and transition risks and compare [financial institutions’] approaches to climate scenario analysis,” the regulator said.
The draft approach to standardized climate exercises is out for comment until Dec. 16. OSFI plans to finalize the methodology and carry out the exercise next year.