On April 7, 2022, the Canadian government released its 2022 Budget, which included an $8 billion investment to support projects that reduce greenhouse gas emissions, as well as the announcement that beginning in 2024, federally regulated institutions, like banks and insurance companies, will be required to provide disclosures on their climate-related risks and exposures.
Several countries have introduced similar plans that would require companies, organizations, and financial institutions to provide disclosures on their climate-related risks and exposures. The U.S. SEC’s proposed climate disclosure rules were just announced in March 2022, the UK government’s climate-related financial disclosures for companies and LLPs were released last year, and more are sure to follow.
Mandatory reporting of climate-related financial risks is one essential step in achieving Canada’s 2030 Emissions Reduction Plan to cut greenhouse gas (GHG) emissions by 40% – 45% by 2030 and toward the country’s goal to transition to net-zero by 2050.
Canada’s New Climate Disclosures for Federally Regulated Institutions Explained
The new climate disclosures requirement included under Chapter 3 “Clean Air and a Strong Economy” of Canada’s Federal Budget 2022, states that using a phased approach, starting in 2024, federally regulated financial institutions will be required to publish climate-related financial risks which align with the TCFD framework.
It also states that in 2022, the Office of the Superintendent of Financial Institutions (OSFI) will advise these institutions on climate disclosure guidelines and will also expect financial institutions to collect and assess information on climate risks and emissions from their clients.
The government will also move forward with requirements for disclosure of environmental, social, and governance (ESG) considerations, including climate-related risks, for federally regulated pension plans.
Ted Dhillon, FigBytes CEO & Co-Founder, shared his excitement about this announcement, “We’re thrilled to see the Canadian government begin to introduce the regulation needed to create a sustainable future. This is a great first step but there’s still work to be done by government and industry leaders to address the climate crisis and standardize ESG reporting.”
What This Means for Banks, Insurance Companies, and Regulated Institutions
The mandatory reporting of climate-related financial risks for banks, insurers, and other federally regulated institutions means that these organizations will have to begin to track and report on a multitude of climate-related metrics.
Canada has elected to align this mandatory reporting with the TCFD framework, which was created to develop recommendations on the types of information that organizations should disclose to support stakeholders, lenders, and insurance underwriters in appropriately assessing and pricing risks related to climate change.
The TCFD framework has four Core Elements of Recommended Climate-Related Financial Disclosures:
- Governance – The organization’s governance around climate-related risks
- Strategy – The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning
- Risk Management – The processes used by the organization to identify, assess, and manage climate-related risks
- Metrics and Targets – Which are used to assess and manage relevant climate-related risks and opportunities
This new reporting requirement also means these institutions will have to start collecting and assessing information on climate risks and emissions from their clients. For banks and insurers, this will be a massive undertaking considering the large number of clients they typically have.
The potential reporting requirements these institutions might have to begin tracking on their clients could range from the carbon footprint of large companies to the water consumption of everyday consumers.
The TCFD divides climate-related risks into two major categories, transition risks, or risks related to the transition to a lower-carbon economy, and physical risks, or risks related to the physical impacts of climate change.
This new reporting requirement is aimed at federally regulated financial institutions due to the prominent role they play in shaping Canada’s economy.
“Heading into 2024, Canada’s financial institutions will need to get systems in place to accurately collect, track, and report on their climate risks. This is no small feat and will require organizations to adopt new technology solutions to meet these reporting requirements and any future mandates.” Dhillon shared.
What This Means for Unregulated Businesses and Organizations
This news, for the moment, only applies to federally regulated financial institutions, however, the disclosure is part of a broader movement by governments to monitor and regulate ESG performance more closely. As more countries are making this type of reporting mandatory, more businesses and organizations will be required to start disclosing their climate-related risks and emissions.
This new reporting requirement could also mean some additional work on the part of unregulated businesses and organizations if they happen to be, or are interested in becoming, clients of the federally regulated financial institutions to which this reporting requirement applies.
As mentioned, regulated institutions will have to begin collecting and assessing climate risk and emissions data from their clients, which means businesses will have to start sharing this information with their banks, insurers, or other regulated institutions, sooner rather than later.
“At the moment this only applies to federally regulated institutions in Canada, but as we approach the 2030 deadline for Canada’s Reduction Plan, we will see more of these types of regulations for more industries.” Dhillon stated, ”From the US to the UK, we are seeing more legislation and mandates in different parts of the world. This is a growing trend, this is going to continue.”
FigBytes has tracked more than 2.5 billion metric tons of carbon emissions for our clients. Speak with a FigBytes expert today to learn about our ESG Platform and how we can help your organization collect, calculate, and report on all your climate-related data, risks, and exposures.