Difference between revisions of "OSFI.Climate"

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==Pop Quiz==
 
==Pop Quiz==
 +
 +
What are the key drivers of flood risk in Canada?
  
 
==Study Tips==
 
==Study Tips==
  
−
This reading covers roughly 30 pages of material.
+
{| class='wikitable' style='background-color: navajowhite;'
 +
|-
 +
||  <span style="color: green;">'''Key Insight:'''</span>
 +
|}
 +
 
 +
* This is OSFI's '''first climate-sensitive prudential framework'''
 +
* Two risk types to master: '''Physical risks''' (weather events) and '''Transition risks''' (low-carbon shift)
 +
* Focus on the '''3 expected outcomes''' and how they drive all requirements
 +
 
 +
{| class='wikitable'
 +
|-
 +
||  '''Study Strategy Summary''':
 +
|}
 +
 
 +
This guideline represents '''Canada's approach to climate financial risk''' - principles-based, forward-looking, and comprehensive. It's structured in two reinforcing chapters.
 +
 
 +
'''Key things to focus on:'''
 +
 
 +
*  2 Climate Risk Types: '''Physical & Transition''' (plus liability risks)
 +
*  3 Expected Outcomes: '''Business Model, Governance, Resilience'''
 +
*  5 Governance Principles: '''Structure, Business Model, Risk Management, Scenarios, Capital'''
 +
*  6 Disclosure Principles: '''Relevant, Specific, Clear, Reliable, Appropriate, Consistent'''
 +
 
 +
'''Estimated study time''': a few hours
 +
 
 +
==Overview: Climate Risk Framework==
 +
 
 +
{| class='wikitable' style='background-color: lightcyan;'
 +
|-
 +
|| 🌪️ '''Why Climate Risk Matters to Financial Institutions'''
 +
|}
 +
 
 +
Climate risks are unique because they:
 +
* Manifest over '''varying time horizons'''
 +
* Can '''intensify over time'''
 +
* Drive traditional financial risks (credit, market, insurance, liquidity)
 +
* Can threaten '''business model viability'''
 +
 
 +
Two Main Risk Categories:
 +
 
 +
📍 '''Physical Risks''':
 +
* Acute: Extreme weather events (floods, hurricanes)
 +
* Chronic: Long-term shifts (sea level rise, temperature changes)
 +
* Indirect: Public health impacts
 +
 
 +
🔄 '''Transition Risks''':
 +
* Policy/regulatory changes
 +
* Technology advancements
 +
* Market sentiment shifts
 +
* Customer preference changes
 +
 
 +
⚖️ '''Liability Risks''':
 +
* Climate-related insurance claims
 +
* Litigation for failure to manage climate risks
 +
 
 +
==The 3 Expected Outcomes ==
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|| '''MEMORIZE These 3 Outcomes'''
 +
|}
 +
 
 +
1. Business Model & Strategy
 +
  * Understand climate impacts
 +
  * Mitigate risks to business model
 +
  * Identify opportunities
 +
 
 +
2. Governance & Risk Management
 +
  * Appropriate structures
 +
  * Effective practices
 +
  * Clear accountability
 +
 
 +
3. Financial & Operational Resilience
 +
  * Withstand severe scenarios
 +
  * Maintain operations during disasters
 +
  * Adequate capital/liquidity buffers
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Climate&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
==Chapter 1: Governance and Risk Management==
 +
 
 +
===The 5 Governance Principles ===
 +
 
 +
{| class='wikitable' style='background-color: pink;'
 +
|-
 +
|  '''5 Principles''' [Hint: <span style="color: red;">'''GBRSC'''</span>]
 +
|}
 +
 
 +
====Principle 1: Governance Structure ====
 +
 
 +
'''Key Requirements''':
 +
* Board oversight of climate risks
 +
* Senior Management accountability
 +
* Consider compensation linkages
 +
* Clear roles and responsibilities
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| 💡 '''Exam Tip''': Senior Management includes CEO, CFO, CRO, CCO + executives for rating/underwriting
 +
|}
 +
 
 +
====Principle 2: Business Model Integration ====
 +
 
 +
'''Requirements''':
 +
* Identify climate impacts on strategy
 +
* Develop '''Climate Transition Plan'''
 +
* Assess plan achievability under scenarios
 +
* Set internal metrics/targets (e.g., GHG)
 +
 
 +
====Principle 3: Risk Management Framework ====
 +
 
 +
'''Integration Requirements''':
 +
* Climate risks in '''Risk Appetite Framework'''
 +
* Climate risks in '''ERM Framework'''
 +
* Climate risks in '''Internal Control Framework'''
 +
* Clear roles across business lines
 +
 
 +
'''Key Process Elements''':
 +
* Data collection (physical + transition)
 +
* Tools and models implementation
 +
* Monitoring and reporting systems
 +
* Risk concentration tracking
 +
 
 +
====Principle 4: Scenario Analysis ====
 +
 
 +
:{| class='wikitable' style='background-color: lightcoral;'
 +
|-
 +
|  '''Unique to Climate Risk''' - Forward-looking is essential!
 +
|}
 +
 
 +
'''Scenario Analysis Uses''':
 +
* Assess strategy resilience
 +
* Identify risk factors
 +
* Estimate exposures/losses
 +
* Test risk management adequacy
 +
 
 +
'''Requirements''':
 +
* Multiple plausible scenarios
 +
* Various time horizons
 +
* Both physical AND transition risks
 +
* Understand methodologies/limitations
 +
 
 +
'''OSFI Standardized Exercises''':
 +
* Mandatory periodic completion
 +
* Enables peer comparison
 +
* Results reported to OSFI
 +
 
 +
====Principle 5: Capital & Liquidity ====
 +
 
 +
'''Integration Points''':
 +
* ICAAP (banks)
 +
* ORSA (insurers)
 +
* Liquidity stress testing
 +
* Buffer adequacy assessment
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Climate&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
==Chapter 2: Climate-Related Financial Disclosures==
 +
 
 +
===Purpose of Disclosures ===
 +
 
 +
{| class='wikitable' style='background-color: lightyellow;'
 +
|-
 +
||  '''Transparency drives better risk management!'''
 +
|}
 +
 
 +
'''Who Benefits''':
 +
* OSFI (prudential supervision)
 +
* Depositors/policyholders
 +
* Investors/analysts
 +
* Public confidence
 +
 
 +
===The 6 Disclosure Principles ===
 +
 
 +
Lots of fluff here but I think it can be simplified to 6 concise points
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|  '''MEMORIZE''': [Hint: <span style="color: red;">'''RSCRAC'''</span>]
 +
|}
 +
 
 +
*<span style="color: red;">R</span>elevant: Current/future impacts specific to FRFI
 +
*<span style="color: red;">S</span>pecific & Comprehensive: Detailed exposure/management info
 +
*<span style="color: red;">C</span>lear & Balanced: Understandable to various users
 +
*<span style="color: red;">R</span>eliable & Verifiable: High-quality, neutral, traceable
 +
*<span style="color: red;">A</span>ppropriate Size: Proportional to FRFI complexity
 +
*<span style="color: red;">C</span>onsistent: Enable inter-period comparisons
 +
 
 +
===Disclosure Content (4 Categories) ===
 +
 
 +
{| class='wikitable' style='background-color: lightblue;'
 +
|-
 +
! Category !! Key Elements !! Implementation
 +
|-
 +
| '''Governance''' || Board oversight, Management roles || 2024/2025
 +
|-
 +
| '''Strategy''' || Risks/opportunities, Business model impacts, Transition plan || 2024/2025 (Plan TBD)
 +
|-
 +
| '''Risk Management''' || Process integration, Scenario analysis use || 2024/2025
 +
|-
 +
| '''Metrics & Targets''' || Climate metrics, GHG emissions, Progress tracking || Phased 2024-2029
 +
|}
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Climate&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
==GHG Emissions Requirements ==
 +
 
 +
There's a lot of material in the annex, which you can read. I believe everything but the GHG emissions are unique to this paper and I'll write up more on them below.
 +
 
 +
===Scope 1 & 2 (Implemented First)===
 +
 
 +
'''Requirements''':
 +
* Separate disclosure (Scope 1 & location-based Scope 2)
 +
* Absolute gross emissions
 +
* Measurement approach disclosure
 +
* GHG Protocol or comparable standard
 +
 
 +
===Scope 3 (Delayed to 2028)===
 +
 
 +
'''Complex Requirements''':
 +
* All 15 categories considered
 +
* Category 15 mandatory (Investments)
 +
* Separate reporting:
 +
  * Financed emissions (loans/investments)
 +
  * AUM emissions (asset management)
 +
  * Insurance-associated emissions (P&C)
 +
 
 +
:{| class='wikitable'
 +
|-
 +
| 💡 '''Don't combine''' financed, AUM, and insurance emissions!
 +
|}
 +
 
 +
==Key Definitions ==
 +
 
 +
{| class='wikitable' style='background-color: lightblue;'
 +
|-
 +
! Term !! Definition !! Exam Focus
 +
|-
 +
| '''Physical Risk''' || Financial risk from climate events || Acute vs. Chronic
 +
|-
 +
| '''Transition Risk''' || Risk from low-GHG transition || Policy, tech, market
 +
|-
 +
| '''Climate Transition Plan''' || Guide for managing climate risks || Now mandatory!
 +
|-
 +
| '''D-SIBs''' || 6 largest Canadian banks || Earlier implementation
 +
|-
 +
| '''IAIGs''' || 4 largest insurers || Sun Life, Manulife, Canada Life, Intact
 +
|-
 +
| '''Category 15''' || Investment emissions || Includes financed, AUM, insurance
 +
|}
 +
 
 +
==Annex Highlights ==
 +
 
 +
===Annex 1-1: Related OSFI Guidance===
 +
* Corporate Governance
 +
* Stress Testing (E-18)
 +
* ORSA/ICAAP (E-19)
 +
* Third-Party Risk (B-10)
 +
* Model Risk (E-23)
 +
* Operational Risk (E-21)
 +
 
 +
===Annex 1-2: Transmission Channels===
 +
 
 +
{| class='wikitable'
 +
|-
 +
! Risk Event !! Impact Type !! Example
 +
|-
 +
| Physical damage || Credit risk || Higher LGD on damaged collateral
 +
|-
 +
| Regulation change || Transition risk || Stranded assets
 +
|-
 +
| Climate litigation || Liability risk || Board legal action
 +
|}
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Climate&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 4]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=OSFI&suffix=Climate&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.''' </span>
 +
 
 +
==Practice Questions ==
 +
 
 +
'''Conceptual Questions:
 +
:: What are the 3 expected outcomes OSFI wants FRFIs to achieve?
 +
:: How do physical and transition risks transmit to traditional financial risks?
 +
:: What must a Climate Transition Plan include?
 +
:: Why are climate scenarios essential (vs. historical data)?
 +
 
 +
'''Disclosure Questions:
 +
:: When must D-SIBs start disclosing Scope 1 & 2 emissions?
 +
:: What are the 6 disclosure principles?
 +
:: How should Category 15 emissions be reported?
 +
 
 +
== Practice Questions Answer Key ==
 +
 
 +
'''Conceptual Questions'''
 +
 
 +
'''Q: What are the 3 expected outcomes OSFI wants FRFIs to achieve?'''
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|| '''Answer: The 3 Expected Outcomes'''
 +
|}
 +
 
 +
1. '''Business Model & Strategy''' 📈
 +
  * The FRFI understands and mitigates against potential impacts of climate-related risks to its business model and strategy
 +
 
 +
2. '''Governance & Risk Management''' 🛡️
 +
  * The FRFI has appropriate governance and risk management practices to manage identified climate-related risks
 +
 
 +
3. '''Financial & Operational Resilience''' 💪
 +
  * The FRFI remains financially resilient through severe, yet plausible, climate risk scenarios, and operationally resilient through disruption due to climate-related disasters
 +
 
 +
'''Q: How do physical and transition risks transmit to traditional financial risks?'''
 +
 
 +
{| class='wikitable' style='background-color: lightblue;'
 +
|-
 +
! Risk Type !! Transmission Channel !! Impact
 +
|-
 +
| '''Credit Risk''' || Physical damage to collateral || Higher loan-to-value and loss given default (LGD)
 +
|-
 +
| '''Market Risk''' || Perception of heightened risk || Mark-to-market investment/trading losses
 +
|-
 +
| '''Insurance Risk''' || Increased weather-related claims || Higher insurance losses and reinsurance costs
 +
|-
 +
| '''Liquidity Risk''' || GHG-intensive portfolios || Diminished funding demand, challenges rolling over debt
 +
|-
 +
| '''Operational Risk''' || Physical damage to premises || Business disruption and operational losses
 +
|}
 +
 
 +
'''Q: What must a Climate Transition Plan include?'''
 +
 
 +
{| class='wikitable' style='background-color: lightyellow;'
 +
|-
 +
|| '''Climate Transition Plan Requirements'''
 +
|}
 +
 
 +
The Climate Transition Plan must:
 +
* ✓ Guide FRFI's actions to manage '''increasing physical risks''' from climate change
 +
* ✓ Address risks associated with '''transition to low-GHG economy'''
 +
* ✓ '''Align with business plan and strategy'''
 +
* ✓ Include '''assessment of achievability''' under different climate scenarios
 +
* ✓ Specify how '''progress will be measured''' (e.g., internal metrics and targets like GHG emissions)
 +
 
 +
'''Q: Why are climate scenarios essential (vs. historical data)?'''
 +
 
 +
{| class='wikitable' style='background-color: pink;'
 +
|-
 +
|| '''Why Forward-Looking Scenarios Are Critical'''
 +
|}
 +
 
 +
Climate scenarios are essential because:
 +
* 🚫 Historical data is '''not predictive''' for climate risks
 +
* ⏰ Climate risks manifest over '''long time horizons''' that exceed historical data
 +
* 📈 Relationships are '''non-linear''' with potential tipping points
 +
* 🌍 Multiple '''plausible futures''' exist that cannot be extrapolated from past
 +
* 🆕 Climate change represents '''unprecedented shifts''' requiring forward-looking analysis
 +
 
 +
'''📊 Disclosure Questions'''
 +
 
 +
'''Q: When must D-SIBs start disclosing Scope 1 & 2 emissions?'''
 +
 
 +
{| class='wikitable' style='background-color: lightcoral;'
 +
|-
 +
|| '''Answer: Fiscal year-end 2024'''
 +
|}
 +
 
 +
* Implementation: '''FY-end 2024'''
 +
* Disclosure deadline: '''180 days after fiscal year-end'''
 +
* Applies to: D-SIBs and IAIGs headquartered in Canada
 +
 
 +
'''Q: What are the 6 disclosure principles?'''
 +
 
 +
{| class='wikitable' style='background-color: lightgreen;'
 +
|-
 +
|| '''The 6 Disclosure Principles - RSCRAC'''
 +
|}
 +
 
 +
1. '''<span style="color: red;">R</span>elevant''' 🎯
 +
  * Information specific to current/future climate impacts on the FRFI
 +
 
 +
2. '''<span style="color: red;">S</span>pecific & Comprehensive''' 📋
 +
  * Detailed exposure and risk management information
 +
 
 +
3. '''<span style="color: red;">C</span>lear & Balanced''' 💡
 +
  * Understandable to range of users, appropriate mix of qualitative/quantitative
  
−
'''Estimated study time''': x mins, or y hrs, or n<sub>1</sub>-n<sub>2</sub> days, or 1 week,... ''(not including subsequent review time)''
+
4. '''<span style="color: red;">R</span>eliable & Verifiable''' ✓
 +
  * High-quality, neutral, traceable information
  
−
==BattleTable==
+
5. '''<span style="color: red;">A</span>ppropriate (Size)''' 📏
 +
  * Proportional to FRFI's size, nature, and complexity
  
−
No past exam questions are available for this reading.
+
6. '''<span style="color: red;">C</span>onsistent''' 🔄
 +
  * Enable meaningful inter-period comparisons
  
−
: {| class='wikitable' style='width: 1000px;'
+
'''Q: How should Category 15 emissions be reported?'''
  
 +
{| class='wikitable' style='background-color: lightyellow;'
 
|-
 
|-
−
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)
+
|| ⚠️ '''CRITICAL: Report Separately - Never Combine!'''
 +
|}
  
 +
{| class='wikitable'
 +
|-
 +
! Emission Type !! Description !! Implementation Date
 +
|-
 +
| '''Financed emissions''' || Loans and investments || 2028
 
|-
 
|-
−
||  
+
| '''AUM emissions''' || Assets under management<br/>• Breakdown by Scope 1, 2, 3<br/>• Include $ amount of AUM<br/>• % of total AUM included || 2029
−
||  
+
|-
−
||  
+
| '''Insurance-associated emissions''' || P&C underwriting portfolios || 2028
−
||
+
|}
−
||
 
  
 +
== Quick Reference Summary==
 +
 +
{| class='wikitable' style='background-color: lightcyan;'
 +
|-
 +
! Topic !! Key Point !! Remember
 +
|-
 +
| 3 Outcomes || Business/Governance/Resilience || Foundation of guideline
 +
|-
 +
| Risk Transmission || Climate → Traditional risks || Through multiple channels
 +
|-
 +
| D-SIBs Timeline || FY 2024 + 180 days || Earlier implementation
 +
|-
 +
| Disclosure Principles || RSCRAC (6 principles) || Guides quality disclosures
 +
|-
 +
| Major Delays || 3-4 year delays || Scope 3, Financed, Industry metrics
 +
|}
 +
 +
==Common Pitfalls ==
 +
 +
{| class='wikitable' style='background-color: mistyrose;'
 +
|-
 +
|| ⚠️ '''Avoid These Mistakes!'''
 
|}
 
|}
  
−
==In Plain English!==
+
* Confusing risk types - Physical ≠ Transition ≠ Liability
−
E(r)-1/2 Aσ^2
+
* Combining emissions - Keep financed/AUM/insurance separate
 +
* Ignoring proportionality - Requirements scale with FRFI size
 +
* Overlooking integration - Climate risk affects ALL risk types
 +
 
 +
==Final Exam Strategy==
 +
 
 +
'''High-Probability Topics''':
 +
* The 3 expected outcomes (conceptual foundation)
 +
* Physical vs. Transition risks (with examples)
 +
* The 5 governance principles
 +
* The 6 disclosure principles
 +
* Implementation timeline (especially delays)
 +
* GHG emissions scopes and Category 15
 +
* Climate Transition Plan requirements
 +
 
 +
'''Remember''': This is OSFI's first climate-sensitive prudential framework - expect questions on WHY it's needed and HOW it differs from traditional risk management
  
 
==POP QUIZ ANSWERS==
 
==POP QUIZ ANSWERS==
 +
 +
Population growth, urban development and climate change

Revision as of 13:40, 25 July 2025

NEW for 2025-Fall:
  • This is a new reading for 2025-Fall.
  • We are currently working on the content and it will be posted here when we're done!

Reading: “Climate Risk Management,” March 2023.

Author: OSFI (Office of the Superintendent of Financial Institutions Canada)

[insert linkForum]

BA Quick-Summary: title

info

  • info
  • info

info

Pop Quiz

What are the key drivers of flood risk in Canada?

Study Tips

Key Insight:
  • This is OSFI's first climate-sensitive prudential framework
  • Two risk types to master: Physical risks (weather events) and Transition risks (low-carbon shift)
  • Focus on the 3 expected outcomes and how they drive all requirements
Study Strategy Summary:

This guideline represents Canada's approach to climate financial risk - principles-based, forward-looking, and comprehensive. It's structured in two reinforcing chapters.

Key things to focus on:

  • 2 Climate Risk Types: Physical & Transition (plus liability risks)
  • 3 Expected Outcomes: Business Model, Governance, Resilience
  • 5 Governance Principles: Structure, Business Model, Risk Management, Scenarios, Capital
  • 6 Disclosure Principles: Relevant, Specific, Clear, Reliable, Appropriate, Consistent

Estimated study time: a few hours

Overview: Climate Risk Framework

🌪️ Why Climate Risk Matters to Financial Institutions

Climate risks are unique because they:

  • Manifest over varying time horizons
  • Can intensify over time
  • Drive traditional financial risks (credit, market, insurance, liquidity)
  • Can threaten business model viability

Two Main Risk Categories:

📍 Physical Risks:

  • Acute: Extreme weather events (floods, hurricanes)
  • Chronic: Long-term shifts (sea level rise, temperature changes)
  • Indirect: Public health impacts

🔄 Transition Risks:

  • Policy/regulatory changes
  • Technology advancements
  • Market sentiment shifts
  • Customer preference changes

⚖️ Liability Risks:

  • Climate-related insurance claims
  • Litigation for failure to manage climate risks

The 3 Expected Outcomes

MEMORIZE These 3 Outcomes

1. Business Model & Strategy 

  * Understand climate impacts
  * Mitigate risks to business model
  * Identify opportunities

2. Governance & Risk Management 

  * Appropriate structures
  * Effective practices
  * Clear accountability

3. Financial & Operational Resilience 

  * Withstand severe scenarios
  * Maintain operations during disasters
  * Adequate capital/liquidity buffers

mini BattleQuiz 1 You must be logged in or this will not work.

Chapter 1: Governance and Risk Management

The 5 Governance Principles

5 Principles [Hint: GBRSC]

Principle 1: Governance Structure

Key Requirements:

  • Board oversight of climate risks
  • Senior Management accountability
  • Consider compensation linkages
  • Clear roles and responsibilities
💡 Exam Tip: Senior Management includes CEO, CFO, CRO, CCO + executives for rating/underwriting

Principle 2: Business Model Integration

Requirements:

  • Identify climate impacts on strategy
  • Develop Climate Transition Plan
  • Assess plan achievability under scenarios
  • Set internal metrics/targets (e.g., GHG)

Principle 3: Risk Management Framework

Integration Requirements:

  • Climate risks in Risk Appetite Framework
  • Climate risks in ERM Framework
  • Climate risks in Internal Control Framework
  • Clear roles across business lines

Key Process Elements:

  • Data collection (physical + transition)
  • Tools and models implementation
  • Monitoring and reporting systems
  • Risk concentration tracking

Principle 4: Scenario Analysis

Unique to Climate Risk - Forward-looking is essential!

Scenario Analysis Uses:

  • Assess strategy resilience
  • Identify risk factors
  • Estimate exposures/losses
  • Test risk management adequacy

Requirements:

  • Multiple plausible scenarios
  • Various time horizons
  • Both physical AND transition risks
  • Understand methodologies/limitations
OSFI Standardized Exercises:
  • Mandatory periodic completion
  • Enables peer comparison
  • Results reported to OSFI

Principle 5: Capital & Liquidity

Integration Points:

  • ICAAP (banks)
  • ORSA (insurers)
  • Liquidity stress testing
  • Buffer adequacy assessment

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Chapter 2: Climate-Related Financial Disclosures

Purpose of Disclosures

Transparency drives better risk management!

Who Benefits:

  • OSFI (prudential supervision)
  • Depositors/policyholders
  • Investors/analysts
  • Public confidence

The 6 Disclosure Principles

Lots of fluff here but I think it can be simplified to 6 concise points

MEMORIZE: [Hint: RSCRAC]
  • Relevant: Current/future impacts specific to FRFI
  • Specific & Comprehensive: Detailed exposure/management info
  • Clear & Balanced: Understandable to various users
  • Reliable & Verifiable: High-quality, neutral, traceable
  • Appropriate Size: Proportional to FRFI complexity
  • Consistent: Enable inter-period comparisons

Disclosure Content (4 Categories)

Category Key Elements Implementation
Governance Board oversight, Management roles 2024/2025
Strategy Risks/opportunities, Business model impacts, Transition plan 2024/2025 (Plan TBD)
Risk Management Process integration, Scenario analysis use 2024/2025
Metrics & Targets Climate metrics, GHG emissions, Progress tracking Phased 2024-2029

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GHG Emissions Requirements

There's a lot of material in the annex, which you can read. I believe everything but the GHG emissions are unique to this paper and I'll write up more on them below.

Scope 1 & 2 (Implemented First)

Requirements:

  • Separate disclosure (Scope 1 & location-based Scope 2)
  • Absolute gross emissions
  • Measurement approach disclosure
  • GHG Protocol or comparable standard

Scope 3 (Delayed to 2028)

Complex Requirements:

  • All 15 categories considered
  • Category 15 mandatory (Investments)
  • Separate reporting:
 * Financed emissions (loans/investments)
 * AUM emissions (asset management)
 * Insurance-associated emissions (P&C)
💡 Don't combine financed, AUM, and insurance emissions!

Key Definitions

Term Definition Exam Focus
Physical Risk Financial risk from climate events Acute vs. Chronic
Transition Risk Risk from low-GHG transition Policy, tech, market
Climate Transition Plan Guide for managing climate risks Now mandatory!
D-SIBs 6 largest Canadian banks Earlier implementation
IAIGs 4 largest insurers Sun Life, Manulife, Canada Life, Intact
Category 15 Investment emissions Includes financed, AUM, insurance

Annex Highlights

Annex 1-1: Related OSFI Guidance

  • Corporate Governance
  • Stress Testing (E-18)
  • ORSA/ICAAP (E-19)
  • Third-Party Risk (B-10)
  • Model Risk (E-23)
  • Operational Risk (E-21)

Annex 1-2: Transmission Channels

Risk Event Impact Type Example
Physical damage Credit risk Higher LGD on damaged collateral
Regulation change Transition risk Stranded assets
Climate litigation Liability risk Board legal action

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Practice Questions

Conceptual Questions:

What are the 3 expected outcomes OSFI wants FRFIs to achieve?
How do physical and transition risks transmit to traditional financial risks?
What must a Climate Transition Plan include?
Why are climate scenarios essential (vs. historical data)?

Disclosure Questions:

When must D-SIBs start disclosing Scope 1 & 2 emissions?
What are the 6 disclosure principles?
How should Category 15 emissions be reported?

Practice Questions Answer Key

Conceptual Questions

Q: What are the 3 expected outcomes OSFI wants FRFIs to achieve?

Answer: The 3 Expected Outcomes

1. Business Model & Strategy 📈 

  * The FRFI understands and mitigates against potential impacts of climate-related risks to its business model and strategy

2. Governance & Risk Management 🛡️ 

  * The FRFI has appropriate governance and risk management practices to manage identified climate-related risks

3. Financial & Operational Resilience 💪 

  * The FRFI remains financially resilient through severe, yet plausible, climate risk scenarios, and operationally resilient through disruption due to climate-related disasters

Q: How do physical and transition risks transmit to traditional financial risks?

Risk Type Transmission Channel Impact
Credit Risk Physical damage to collateral Higher loan-to-value and loss given default (LGD)
Market Risk Perception of heightened risk Mark-to-market investment/trading losses
Insurance Risk Increased weather-related claims Higher insurance losses and reinsurance costs
Liquidity Risk GHG-intensive portfolios Diminished funding demand, challenges rolling over debt
Operational Risk Physical damage to premises Business disruption and operational losses

Q: What must a Climate Transition Plan include?

Climate Transition Plan Requirements

The Climate Transition Plan must:

  • ✓ Guide FRFI's actions to manage increasing physical risks from climate change
  • ✓ Address risks associated with transition to low-GHG economy
  • ✓ Align with business plan and strategy
  • ✓ Include assessment of achievability under different climate scenarios
  • ✓ Specify how progress will be measured (e.g., internal metrics and targets like GHG emissions)

Q: Why are climate scenarios essential (vs. historical data)?

Why Forward-Looking Scenarios Are Critical

Climate scenarios are essential because:

  • 🚫 Historical data is not predictive for climate risks
  • ⏰ Climate risks manifest over long time horizons that exceed historical data
  • 📈 Relationships are non-linear with potential tipping points
  • 🌍 Multiple plausible futures exist that cannot be extrapolated from past
  • 🆕 Climate change represents unprecedented shifts requiring forward-looking analysis

📊 Disclosure Questions

Q: When must D-SIBs start disclosing Scope 1 & 2 emissions?

Answer: Fiscal year-end 2024
  • Implementation: FY-end 2024
  • Disclosure deadline: 180 days after fiscal year-end
  • Applies to: D-SIBs and IAIGs headquartered in Canada

Q: What are the 6 disclosure principles?

The 6 Disclosure Principles - RSCRAC

1. Relevant 🎯 

  * Information specific to current/future climate impacts on the FRFI

2. Specific & Comprehensive 📋 

  * Detailed exposure and risk management information

3. Clear & Balanced 💡 

  * Understandable to range of users, appropriate mix of qualitative/quantitative

4. Reliable & Verifiable ✓ 

  * High-quality, neutral, traceable information

5. Appropriate (Size) 📏 

  * Proportional to FRFI's size, nature, and complexity

6. Consistent 🔄 

  * Enable meaningful inter-period comparisons

Q: How should Category 15 emissions be reported?

⚠️ CRITICAL: Report Separately - Never Combine!
Emission Type Description Implementation Date
Financed emissions Loans and investments 2028
AUM emissions Assets under management
• Breakdown by Scope 1, 2, 3
• Include $ amount of AUM
• % of total AUM included		 2029
Insurance-associated emissions P&C underwriting portfolios 2028

Quick Reference Summary

Topic Key Point Remember
3 Outcomes Business/Governance/Resilience Foundation of guideline
Risk Transmission Climate → Traditional risks Through multiple channels
D-SIBs Timeline FY 2024 + 180 days Earlier implementation
Disclosure Principles RSCRAC (6 principles) Guides quality disclosures
Major Delays 3-4 year delays Scope 3, Financed, Industry metrics

Common Pitfalls

⚠️ Avoid These Mistakes!
  • Confusing risk types - Physical ≠ Transition ≠ Liability
  • Combining emissions - Keep financed/AUM/insurance separate
  • Ignoring proportionality - Requirements scale with FRFI size
  • Overlooking integration - Climate risk affects ALL risk types

Final Exam Strategy

High-Probability Topics:

  • The 3 expected outcomes (conceptual foundation)
  • Physical vs. Transition risks (with examples)
  • The 5 governance principles
  • The 6 disclosure principles
  • Implementation timeline (especially delays)
  • GHG emissions scopes and Category 15
  • Climate Transition Plan requirements

Remember: This is OSFI's first climate-sensitive prudential framework - expect questions on WHY it's needed and HOW it differs from traditional risk management

POP QUIZ ANSWERS

Population growth, urban development and climate change

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