OSFI releases discussion paper on climate-related risks for federally regulated pension plans
On January 11, 2021, the Office of the Superintendent of Financial Institutions (OSFI) published Navigating Uncertainty in Climate Change: Promoting Preparedness and Resilience to Climate-Related Risk. OSFI intends to engage with federally regulated financial institutions (FRFIs), federally regulated pension plans (FRPPs) and other interested stakeholders on the risks resulting from climate change and how they affect the soundness of FRFIs and FRPPs.
Climate-related risks and impact on FRPPs
OSFI discusses the following climate-related risks for FRPPs.
Physical risk (e.g., a severe weather event): physical risk arises from a changing climate, increasing the frequency and severity of wildfires, floods, wind events and rising sea levels, among other things. Such a climate event can affect the value of an FRPPs’ holdings in investments, such as commercial real estate.
Transition risk (e.g., increased regulation related to greenhouse gas (GHG) intensive industries): transition risk stems from efforts to reduce GHG emissions as the economy shifts toward a lower GHG footprint and can emerge as a result of current or future government policies to reduce emissions, technological advancements and changes in investor or consumer sentiment. Transition risk can materially change the investment environment over time. As such, FRPPs can be impacted to the extent that their investment is impacted by the transition to a lower GHG economy.
Liability risk (e.g., parties who have suffered loss and damage from climate change seek to recover losses from those whom they believe are responsible): liability risk relates to potential exposure to the risks associated with climate-related litigation. FRPPs may be exposed to various liability risks as a result of climate-related litigation, such as claims by pension plan members or other stakeholders for failing to account for possible risks to GHG-intensive assets.
Promoting FRPP preparedness and resilience against climate-related risks
To achieve preparedness and resilience to climate-related risks, the discussion paper highlights the need to develop a climate-related risk appetite and strategy, as well as, implementation of governance and risk management practices that are commensurate with the FRPP’s circumstances. OSFI expects FRPP administrators to consider a wide range of factors affecting their ability to prudently administer their pension plans, including risks that could impact long-term investment performance. OSFI suggests the following ways that FRPP administrators could manage climate-related risks.
Pension plan administrators are advised to assess how the transition to a lower GHG economy may impact the FRPP’s investment policy and strategy in the longer term. In addition, prudent management and investment of pension plan assets for an
FRPP can also involve evaluating new investment opportunities that may arise from climate change, in the context of the FRPP’s Statement of Investment Policies and Procedures (SIP&P).
OSFI indicates that FRPP administrators can systematically manage material climate-related risks within their investment portfolio through effective governance. Implementing controls in investment decision-making processes, for example, can help to assess alignment of the pension plan’s climate-related risk management with its risk appetite.
For example, administrators that delegate investment decisions to an investment manager can seek to include climate-related risk considerations in the investment manager’s mandate, or choose an investment manager based on its approach to climate-related risks.
OSFI guidance on climate-related risks
Although OSFI recognizes that the current FRPP guidance does not explicitly reference climate-related risks, it notes that the guidance does include principles and expectations that are relevant to FRPPs’ management of these risks. However, OSFI confirms that it is reviewing its FRPP guidance, supervisory processes and reporting requirements to determine whether they sufficiently account for climate-related risks.
OSFI hopes to gain an understanding of how FRFIs and FRPPs define, identify, measure and build resilience to climate-related risks. OSFI also seeks feedback on how it can facilitate FRFIs’ and FRPPs’ preparedness and resilience to such risks.
Stakeholders are invited to submit their submissions and comments to OSFI no later than April 12, 2021.
OSFI’s discussion paper is exploratory and not an official guideline, and furthermore only affects federally regulated pension plans. However, it may signify growing future attention on climate-related risk management by pension regulators in respect of pension investment management.