The consultation on climate-related risks launched by the Office of the Superintendent of Financial Institutions (OSFI) is a positive for the big Canadian banks, says Moody’s Investors Service.
In a new report, the rating agency said that OSFI’s discussion paper that examines the risks posed by global warming — and contemplates possible regulatory action to ensure financial institutions and pension plans are addressing those risks — will push the big banks to define, measure and “build resilience to climate-related risks.”
Moody’s said that it expects these sorts of risks to grow as the transition to a low-carbon economy accelerates and the physical effects of climate change continue to occur.
“The transition to a low-carbon economy poses increasing business risks for banks because they face mounting pressure from customers, investors and regulators to meet broader carbon transition goals in their role as capital providers,” the rating agency said.
Against that backdrop, OSFI’s consultation “will gradually improve banks’ ESG risk-management processes,” Moody’s said, adding that this would be a positive for the banks.
“Depending on implementation, the consultation measures could strengthen banks’ reporting, transparency, prudential treatment and supervision of environmental risk in their asset portfolios. They could also strengthen Canada’s banking system overall,” Moody’s said.
Moody’s said that it doesn’t expect OSFI to impose prescriptive guidance on climate risks.
“OSFI will likely encourage the banks to incorporate climate change explicitly in their suite of stress tests,” the rating agency noted.
Ultimately, the regulator’s efforts to build climate risks into its oversight “will help create standards and best practices for climate change risk management across the banking, insurance and pension industries,” Moodys said.