OSFI.Climate

Question 1

What are transition risks and what can trigger them?

Answer 1

Financial risks from adjusting to a low-GHG economy.

Triggers include: government policies/legislation, technological advancements, and changes in market/customer sentiment.

Question 2

What is a ‘liability risk’ in the context of climate risk?

Answer 2

Risk of climate-related claims under liability policies, and litigation/direct actions against FRFIs for failing to manage their climate-related risks.

Question 3

2/5 principles for climate risk governance and risk management established by OSFI

Answer 3

1. Governance Structure: Establish appropriate board oversight and senior management accountability for climate-related risks
2. Business Model Integration: Incorporate climate impacts into the business strategy and develop a formal Climate Transition Plan
3. Risk Management Framework: Integrate climate risks into the institution's Risk Appetite Framework, Enterprise Risk Management (ERM), and internal controls
4. Scenario Analysis: Use climate scenario analysis to assess impact on risk profile, business strategy, and business model. Considerations:Both physical AND transition risks, Range of plausible models and scenarios,Short- medium- and long-term horizons..
5. Capital and Liquidity: Maintain sufficient capital and liquidity buffers to protect against climate-related risks and integrate climate risks into stress testing processes like ORSA

Question 4

What are the four objectives of climate scenario analysis?

Answer 4

1) Assess impact on strategy/risk profile and business model resilience;
2) Identify risk factors and estimate exposures;
3) Identify data/methodology limitations;
4) Inform adequacy of the risk management framework.