Finance Committee on April 20th, 2023

[Peter Routledge]

In our climate scenario analysis, which we did last year with the Bank of Canada, we looked at that. What happens is the longer you delay adapting to climate change, the greater the risk of financial instability.

If we stopped all of this today, would the system buckle? No. Funding costs would probably go up.

In the 2030s, when the impact of climate change and the impacts of the transition that other countries are making are starting to be felt, there would be a rising risk of financial instability in Canada.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Basically, managing climate risk is not an expansion of your scope. It's core to managing risk within the financial system and protecting savings, the housing market and the loans that Canadians rely on every day.

Is that fair to say?

[Peter Routledge]

We see managing climate risk as core to our purpose and the mandate assigned to us by Parliament.

[The Chair, Liberal, Peter Fonseca]

Thank you. That's the time.

Thank you, Mr. Baker and Mr. Routledge.

Now, it's over to the Bloc and Mr. Ste-Marie, please, for six minutes.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Routledge, Mr. Tardif, thank you for being here with us.

I would just like to add that we applaud this vision wholeheartedly.

I have a few questions on guideline B‑15, which was released last month. What has been the reaction from institutions and investment funds to this guideline?

[Peter Routledge]

That's a great question.

The institutions we regulate have an eye toward how Canadian institutions are perceived by Canadians, certainly, and by investors globally. They accepted the premise that we needed to have a regulatory regime around climate change.

This consultation we did over the last year was characterized by a great deal of give-and-take with institutions of all sizes. We calibrated our guideline in a way that made it manageable and adaptable for the institutions in question. They would tell you, I think, and they have said this publicly, that they are very concerned that we would abruptly increase capital requirements for climate risk and do so in a way that “unlevelled the playing field”.

We will not do that. We will make a concerted effort to make sure we quantify and measure the risks associated with climate change and then ensure institutions manage those risks, with all the other risks they have, and ensure they have ample capital and liquidity buffers for all risks. If something goes wrong that you don't expect, the institution absorbs the hit and keeps going.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you for the answer.

How would you compare guideline B‑15 with what has been done in Europe and the United States?

[Peter Routledge]

Stephane.

[Stephane Tardif, Managing Director, Climate Risks, Office of the Superintendent of Financial Institutions]

With regard to the work we did to benchmark ourselves against other jurisdictions, this is something we spent a lot of effort doing. Just to give you some hard evidence from some of our peer jurisdictions, for example, the U.K. has had similar guidance in place since 2019. The European Union, under the European Central Bank and the European Banking Authority, has had these expectations since probably 2020 and is now supervising its financial institutions against those expectations and incorporating the effectiveness of climate risk management in the risk assessments that the European Central Bank and the European Banking Authority are doing.

What B-15 did was raise our expectations and bring us in line with what's happening with our G7 and G20 partners.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

I have a more technical question on Part III of Chapter 1. I don't know if this is the same topic that my colleague Adam Chambers was asking about, because the numbers are not the same. You said that this part would become a separate chapter in the next version of the guideline. Why?

[Stephane Tardif]

Given that the management of climate-related risks is relatively nascent, our understanding of the trajectory of how these risks will manifest within our system is evolving. We felt it was important to signal to the market that guideline B-15 will be iterative. It will be evergreen, and B-15 in March was simply the first two chapters of that evolution.

We felt, in the spirit of transparency, that we would tell the market and tell industry that we are continuing internal efforts to understand how to incorporate climate scenario analysis, for example, to understand the data needs that institutions will require. There's an evolution in the thinking, and we're simply saying that there might be additional chapters that could touch on things like scenario analysis, capital, liquidity and other topics.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you. My speaking time is limited and is running out. I have one last technical question.

Principle 2 contained in Chapter 2 states that federal financial institutions should “disclose specific and comprehensive information”. What standards must they meet? You spoke of an approach that would be tailored to the size of the institution. Are there any similarities or links with what institutions will do here in Canada and what is required in Europe, for example?

[Stephane Tardif]

We grounded our disclosure expectations in the FSB's task force on climate-related financial disclosures. I would remind the committee that this standard has been in practice internationally since 2017. Many of our institutions have voluntarily signed up to the TCFD and are already disclosing along that framework.

We also proportionally phased in disclosure requirements based on the size and complexity of our institutions, so the largest, most complicated financial institutions will start to have to disclose in 2025, and then we phase those in in subsequent years depending on the type of disclosure.

They are meeting international standards, I would say, for example, with what's coming internationally with the International Sustainability Standards Board. We are bringing our institutions to a standard of disclosure that is already in practice in many other jurisdictions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we go to Mr. Blaikie, please, for six minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

I'm going to take just a slightly different tack from what we've been discussing so far.

The last time we had the Parliamentary Budget Officer here at committee, we had what I think was a good and constructive conversation about carbon pricing, and we identified that there are three considerations in respect to carbon pricing. There's cash-out, cash-in, in respect to the rebate; then there's the further calculation of wider economic costs to Canadians as a result of carbon pricing that's not necessarily what they pay directly as a charge, as it were; and then the other category was the benefit of emissions reduction over time.

What the Parliamentary Budget Officer said was that he's looked at the first category, and he's looked at the second category, but there's really not enough certainty and there's not an effective modelling to try to figure out what kinds of consumer savings would be generated by lowering carbon emissions in the economy over time.

You've now undertaken this work. You're requiring investors and companies to do climate scenario analysis. I'm wondering the extent to which the models that are being developed for risk assessment might hold some promise to be able to make some projections about the consumer impact of emissions reduction over time, so that we can calculate that into an overall assessment of what a carbon price actually costs Canadians as a net benefit or a net cost.

[Peter Routledge]

The analysis proposed, just to be clear and straight, would be a second-order analysis. In other words, the first wave of analysis will be understanding the extent of a financial institution's exposure to assets or investments that have an emissions component to them, and then trying to understand, all right, what happens over time as the cost of those emissions goes up.

That's the first step, I think, and then in time, if I were a bank's CEO or chief risk officer, I'd want to start asking what the impact is on the consumer wallet and how that might affect consumer well-being and, ultimately, consumer credit quality. Then you might start to see people asking that creative analytical question: Can we forecast out what the benefits are to the consumer wallet, and how I am benefiting? We're a ways away from that, though.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

I certainly hear that we're a ways away from that, and I think that was the answer, by and large, that we got very clearly from the PBO, but I wanted to assess the promise of this climate scenario analysis for perhaps being able to deliver that, because I think—and I'm not proposing that this is a problem for you to solve, and certainly not here at the table today—the problem is that it would be difficult to have an honest debate with Canadians about the impact of carbon pricing, because the analyses will be skewed against carbon pricing as long as we can quantify indirect costs to consumers without being able to quantify indirect benefits. There is a structural deficit in the empirical side of the argument that's going to favour arguments against carbon pricing until we can quantify potential indirect benefits to consumers.

Partly I just want to note that, and I want to take away from this conversation—correct me if I'm wrong—that there is some promise in the work that you're requiring companies to do, or strongly suggesting that companies do, as a regulator, that we might actually be able to one day quantify those indirect benefits once this raw information is more readily available and more readily understood by various actors in the economy.

[Peter Routledge]

In the course of just normal credit analysis, the more alternative views you take into risk, the more insights you reveal. For example, I know of a retailer who entered the banking business. They found out that certain trends in spending were very good predictors of the creditworthiness of customers. For example, people who buy felt tips for the bottoms of their chairs tend to be better credit risks. That's what the data shows.

In terms of that type of insight, we're not there yet, but it's not unusual for that to emerge when you take a different view into risk.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. Thank you very much for that.

Following up on Mr. Baker's line of questioning about what the consequences are of not being able to do this kind of work, you talked about foreign capital markets and the fact that Canadian financial institutions and other Canadian players go into foreign capital markets in order to raise capital for investments here in Canada.

Has there been in your journey up to here an attempt to quantify what the negative effect on foreign direct investment could be for Canada if international investors or financial institutions in other countries lose confidence in the Canadian financial institution because, in their opinion, it's not adequately preparing for climate risk, understanding climate risk and integrating that understanding into its practices?

[Peter Routledge]

To my knowledge there have been no international studies on that question of how far spreads would widen in response to a Canadian financial institution maybe not being up to snuff on climate risk management. The banks that we regulate have roughly $7 trillion in assets that they manage, that are on the balance sheet, and one basis point of widening times $7 trillion is a huge number, so it could be material.

[The Chair, Liberal, Peter Fonseca]

Thank you for that.

Thank you, Mr. Blaikie. That's the end of our first round.

We are moving into our second round. We'll have time for one full second round. We'll start with the Conservatives.

Mr. Chambers, you have five minutes, please.

[Adam Chambers, Conservative, Simcoe North, ON]

Thanks very much, Mr. Chair.

Mr. Routledge, I apologize on behalf of the chair, who didn't give you a chance to respond to my last comment, but I think we got that out in the previous rounds.

It's safe to say that you think the work of B‑15 is very core to OSFI's mandate. Is that what I understand you to believe?

[Peter Routledge]

We think our work on climate risk management flows from the purpose in our mandate.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay.

What are the costs of non-compliance? What if a financial institution just doesn't disclose? What happens to them?

[Peter Routledge]

We have a principles-based regulatory system. It's important to understand that B-15 is not a set of rules whereby there's a penalty—a speeding ticket, if you will—if they don't comply. There is an articulated level of interactions with boards and senior managers. When we as a regulator deem an institution to be out of line with the principles set forth in our guidelines—for example, if they're underwriting mortgages in a way that contravenes our guideline B-20—we don't hit them with a penalty. We sometimes have extended conversation about that.

I suspect that if a board member or a senior executive were before this committee and were asked what would happen in non-compliance, they would say that the regulator would start off those conversations and would require or ultimately oblige—“oblige” is better than “require” in a principles-based system—institutions to come into conformance.