OSFI Summarizes Responses to Its Climate Risk Discussion Paper
November 8, 2021
On January 11, 2021, the Office of the Superintendent of Financial Institutions Canada (“OSFI“) published a discussion paper, Navigating Uncertainty in Climate Change: Promoting Preparedness and Resilience to Climate-Related Risks (the “Discussion Paper“), and launched a three-month consultation period in regards to it.
The goal of the consultation was to engage federally regulated financial institutions (“FRFIs“), federally regulated pension plans (“FRPPs“), and other interested stakeholders in a dialogue on climate-related risks. We summarized the highlights of the Discussion Paper in a blog post linked here.
During the consultation period, which ended on April 12, 2021, OSFI received feedback from over 70 respondents. On October 12, 2021, OSFI released a summary of the feedback, outlined below.
OSFI concluded that respondents generally support its focus on climate-related risks and that there was general agreement that any new OSFI climate-related guidance should be principles-based and aligned with global standards where they exist, while considering the Canadian context. Many FRFI and FRPP respondents indicated that they were in the “early stages” of assessing and quantifying climate-related risks.
In its Discussion Paper, OSFI identified three overarching categories of climate-related risk, all of which were described by OSFI as complex and systemic:
- Physical risk arises from a changing climate and increasing frequency and severity of weather-related events, including wildfires, floods, drought, wind events and rising sea levels. In addition to their other impacts, these events can threaten the value of certain investments held by FRFIs and FRPPs.
- Transition risk arises as a result of efforts to reduce GHG emissions and a shift in the economy towards a lower-GHG footprint. This category of risks includes new government policies and increased regulation, technological advancements, and changes in investor or consumer sentiment.
- Liability risk relates to potential exposure of FRFIs and FRPPs to the risks associated with climate-related litigation. Some examples include
- an increase in tortious claims against FRFIs and FRPPs for their contributions to climate change
- claims from investors, pension plan members or stakeholders for failing to account for possible GHG-intensive assets; and
- liability for FRFI Boards and FRPP administrators for failing to fulfill their legal or fiduciary duties.
Respondents agreed that climate-related risks are drivers of both financial and non-financial risks. More particularly:
- Physical and transition risks are categories of climate-related risks that can affect the safety and soundness of FRPPs;
- Respondents suggested that OSFI broaden its characterization of physical climate-related risks to also include risks to public health (morbidity and mortality impacts) due to extreme weather events, poor air quality and increased vector-borne diseases due to changing temperatures, precipitation and humidity; and
- Respondents suggested that standardized taxonomy, measurement methodologies and metrics across industry can help FRPPs improve their definition, identification, measurement, and management of climate-related risks. Many respondents believed that OSFI has an important role to play in facilitating these standards.
Ways FRPPs Can Prepare For, and Build Resilience to, Climate-related Risks
Respondents generally believed that it was appropriate for FRPP administrators to consider climate-related risks and other environmental, social, and governance (“ESG“) factors in making investment decisions where they are relevant to the financial performance of investment pursuant to their fiduciary duty to act prudently.
Respondents indicated that FRPP administrators may be able to address these risks by engaging in scenario analysis and considering ESG factors in selecting investment managers.
In the case of climate change, scenario analysis allows an organization to explore and develop an understanding of how various combinations of climate-related risks, both transition and physical risks, may affect its business, strategies, and financial performance over time. While respondents agreed that it would be useful for FRPP administrators to use scenario analysis to assess a plan’s exposure to climate-related risks, they suggested it would be challenging and complex to build in-house scenarios. As such, respondents suggested that scenario analysis may not be feasible for all FRPPs.
We note that, in its recommendations, the Task Force on Climate-Related Financial Disclosure (“TCFD”) urges all organizations exposed to climate-related risks to consider (1) using scenario analysis to help inform their strategic and financial planning processes; and (2) disclosing how resilient their strategies are to a range of plausible climate-related scenarios.”
While acknowledging the complexities of scenario analysis, the TCFD recommends that for organizations just beginning to use scenario analysis, a qualitative approach that progresses and deepens over time may be appropriate. Greater rigour and sophistication in the use of data and quantitative models and analysis may be warranted for organizations with more extensive experience in conducting scenario analysis. In doing so, organizations may decide to use external scenarios and models (e.g., those provided by third-party vendors) or may develop such capabilities in-house.
Consideration of ESG Factors in Selecting Investment Managers
Respondents indicated that plan administrators can review the approaches used to evaluate ESG factors (including climate change) when selecting investment managers. More specifically, key selection criteria can include assessing the investment manager’s approach to portfolio construction, governance and risk management practices, and stewardship activities. We note that neither the Discussion Paper, nor the summary of responses, provided specific parameters for defining ESG factors. However, OSFI stated in its Discussion Paper that “[a] broader discussion on ESG factors may be considered in future discussion papers.”
We note that the U.S. Department of Labour recently announced proposed amendments to the Employee Retirement Income Security Act of 1974 (“ERISA“) that, among other changes, would confirm that plan fiduciaries may consider ESG factors in satisfying their duties to: (i) give “appropriate consideration” to the facts and circumstances that, given the scope of the fiduciary’s investment duties, the fiduciary knows or should know are relevant to the particular investment and (ii) act accordingly. In other words, plan fiduciaries in the United States need not only consider pecuniary factors in making investment decisions.
The proposed amendments also include certain non-exclusive factors that a fiduciary may consider in the evaluation of an investment or investment course of action, including:
- Climate-change related factors, such as a corporation’s exposure to the real and potential economic effect of climate change, including its exposure to the physical and transition risks of climate change and the positive or negative effect of governmental regulations and policies to mitigate climate change;
- Governance factors, such as those involving board composition, executive compensation, and transparency and accountability in corporate decision-making, as well as a corporation’s avoidance of criminal liability and compliance with labour, employment, environmental, tax, and other applicable laws and regulations; and
- Workforce practices, including the corporation’s progress on workforce diversity, inclusion and other drivers of employee hiring, promotion, and retention; its investment in training to develop its workforce’s skills; equal employment opportunity; and labour.
Importantly, the changes to ERISA would also clarify that, under the ERISA fiduciary duty of loyalty, ESG considerations including climate-related financial risk are, in appropriate cases, risk-return factors that fiduciaries should consider when selecting and monitoring plan investments.
Climate-Related Financial Disclosure
Respondents indicated that stakeholder interest is a key driver of voluntary climate-related financial disclosures. In particular, respondents stated that stakeholders such as investors, shareholders rating agencies and regulators drive voluntary disclosures. Respondents also noted that some other drivers of voluntary climate-related disclosure include the influence of other players in the industry and the direction of public policy.
OSFI noted that most organizations that provide climate-related financial disclosure follow the TCFD recommendations.
By contrast, we note that the Occupational Pension Schemes (Climate Governance and Reporting) Regulations 2021 in the United Kingdom (the “Regulations“) recently introduced requirements for pension schemes to report in line with TCFD recommendations. The aim of the Regulations is to improve both the quality of governance and the level of action by plan trustees in identifying, assessing and managing climate risk. The Department for Works & Pensions provides helpful guidance for trustees of occupational schemes for complying with the Regulations (the “Guidance“).
While pension schemes in the UK are phased in to the application of the Regulations, trustees must produce and publish a report (“TCFD report“) containing the information required by the Regulations within 7 months of the end of any scheme year in which they were subject to the climate change governance requirements. Certain pension schemes will be required to publish TCFD reports on an annual basis.
The Guidance states that a “significant benefit of making TCFD reports publicly available is that it will provide members with the opportunity to engage with their scheme’s climate-related risks and opportunities, and the potential impacts on their pension savings.”
Finally, the Guidance stresses the importance of scenario analysis and provides helpful guidance on how plan trustees with no or limited experience may start to engage in more sophisticated scenario analysis.
OSFI’s Role in Climate Change
Generally speaking, respondents recommended that any new OSFI guidance be principles-based and aligned with global standards, while considering the Canadian context. Respondents provided suggestions with respect to OSFI’s role in climate change with respect to FRPPs, including:
- OSFI should harmonize guidance expectations and reporting requirements for FRPPs with provincial regulators and international standards setters;
- OSFI should also consider the plan administrator’s fiduciary duty and the broader ESG lens; and
- OSFI should consider standardizing, mandating or collaborating with other regulators, standard setters and stakeholders on climate-related scenario analysis, disclosure, risk-measurement methodologies and metrics, and taxonomy.
For FRPPs, OSFI will continue to collaborate with the Canadian Association of Pension Supervisory Authorities to develop guidance on integrating ESG factors in pension investment decisions where they are relevant to the financial performance of an investment pursuant to the plan administrator’s fiduciary duty to act prudently. OSFI will assess the need for further guidance after that time.
 Respondents’ views differed on whether liability risk is a separate category or a subset of transition risk.
 Scenario analysis is a process for identifying and assessing the potential implications of a range of plausible future states under conditions of uncertainty.
 Task Force on Climate-Related Financial Disclosures, Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) at page 27.
 Ibid. at page 29.
 Heather L. Coleman, Eric M. Diamond & Marc Treviño, “U.S. DOL Proposes ESG-Related Updates to the ERISA Investment Duties Regulation” Harvard Law School Forum on Corporate Governance (October 22, 2021) <https://corpgov.law.harvard.edu/2021/10/22/%E2%80%8Bu-s-dol-proposes-esg-related-updates-to-the-erisa-investment-duties-regulation/ >.
 UK, Department for Work and Pensions, Taking Action on Climate Risk: Improving Governance and Reporting by Occupational Pension Schemes (Consultation Outcome Overview) (July 2021) <https://www.gov.uk/government/consultations/taking-action-on-climate-risk-improving-governance-and-reporting-by-occupational-pension-schemes>.
 UK, Department for Work and Pensions, Governance and Reporting of Climate Change Risk: Guidance for Trustees of Occupational Schemes (Statutory Guidance) (June 2021).
 Ibid at page 16.
 Ibid. at pages 26 and 27.
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