Climate Risk and Canadian Banks : Is More Capital Required?

A green wave of regulations is headed for Canada’s banks. Regulators at home and abroad are generating new rules for financial institutions regarding the monitoring, disclosure and mitigation of climate-related risks.In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has issued an initial draft guideline on climate-risk management for federally regulated financial institutions, and is seeking comment from stakeholders before issuing a revised version in early 2023.Globally there is a rapid if uneven evolution toward adoption of the disclosure guidelines proposed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), with momentum building toward mandatory adoption. To implement the TCFD recommendations, banks will need to obtain more standardized and detailed information from their clients on the business and projects being financed and how the business and related climate impacts will evolve over time.Amid this green regulatory wave, this E-Brief focuses on a crucial question: Should banks’ capital requirements be increased to reflect climate-related risks?