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Climate activists Vanessa Nakate, Helena Gualinga and Elizabeth Wathuti hold signs, during a Fridays for Future climate strike on the last day of the World Economic Forum in the alpine resort of Davos, Switzerland, on May 26.ARND WIEGMANN/Reuters

Canada’s banking regulator will demand banks, lenders and insurers provide a host of detailed disclosure about the impact of climate change on their businesses as it seeks to ensure the country’s financial system is protected from such growing risks.

The Office of the Superintendent of Financial Institutions, or OSFI, released new draft rules it said will force banks and the other institutions to assess and deal with potential weak spots from physical climate risks and those stemming from economic and policy changes.

In addition, OSFI will require all institutions under its purview to adopt the reporting framework of the Task Force on Climate-related Financial Disclosures, or TCFD, which has become a global standard.

This will help bolster public confidence in Canada’s financial system by increasing transparency, OSFI said.

Many financial institutions are in the early stages of improving their climate-related risk-assessment capabilities, but the regulator said it is now asking them to go further by pinpointing vulnerabilities in their business models, their operations and balance sheets.

The new climate risk management guideline for financial institutions is the latest effort to reduce the potential damage to business and the Canadian economy from climate change and efforts to limit it. Last year, OSFI and the Bank of Canada warned long-term economic growth and financial stability could be put in jeopardy if the country delays implementing policies to deal with the transition to a low-carbon world.

Among other regulators, the Canadian Securities Administrators, which represents the country’s provincial securities commissions, is moving forward with its own mandatory reporting rules, based on TCFD methods.

Canada is also home to a major office of the new International Sustainability Standards Board, which has released its own draft guidelines that include TCFD standards. Those standards, developed under the international Financial Stability Board, include numerous disclosures, from board-level responsibility for climate risks, to tallies of greenhouse gas emissions, to analysis of business prospects under a range of future temperature scenarios.

OSFI said it wants the companies it regulates to understand and lessen the potential climate risks to their business models and strategies, as well as to put appropriate governance and practices in place. It also wants institutions to be “financially resilient through severe, yet plausible, climate-risk scenarios, and operationally resilient through disruption due to climate-related disasters.”

Officials gave no immediate estimates of increases in capital that financial institutions may have to keep in reserve to deal with potential climate-related shocks. The data gleaned from the public consultation phase will help OSFI make that decision.

The guidelines are open for comment until Aug. 19, OSFI said. The policies would come into effect next year and be phased in through 2027.

The major banks are already moving forward with detailed climate-related disclosure as well as targets to reduce emissions from their own operations and companies for which they lend and raise capital. The last category, known as Scope 3 or financed emissions, would be calculated and reported by all of the institutions by the end of the phase-in.

OSFI officials said it was important to move to mandatory disclosure, because not all of the companies it regulates are “captured” by other bodies that are imposing such rules, such as the CSA or industry coalitions including the Glasgow Financial Alliance for Net Zero.

OSFI took criticism from environmentalists, including Greenpeace, which said its guidelines do not force the industry to do what is necessary to prosper in a global average temperature gain of just 1.5 C, seen as the most ambitious 2050 scenario. OSFI should also increase institutions’ capital requirements for lending to fossil-fuel companies and other high-carbon industries, said Alex Speers-Roesch, climate policy analyst for Greenpeace Canada.

“We would like to see them go beyond and have capital requirements reflect, in a broader sense, the risks that the activities that are being financed with that lending pose to society from climate change,” he said. “That’s a way to tilt the financing away from higher-polluting activities ... to help finance the transition.”

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