How credit unions can get ahead of climate risk and OSFIs new requirements
How credit unions can get ahead of climate risk and OSFIs new requirements
In an evolving regulatory environment, credit unions need to act now to stay ahead of climate risk. Explore how upcoming regulations, like OSFI’s Standardized Climate Scenario Exercise, will impact credit unions and why proactively addressing both transition and physical risk is crucial. Learn how credit unions can safeguard their assets, fine tune lending strategies, and strengthen long-term resilience, all while preparing for future provincial regulations.
Climate-related risks are reshaping the financial landscape, and credit unions need to stay ahead. While the Office of the Superintendent of Financial Institutions’ (OSFI) standardized climate scenario exercise (SCSE) currently applies to federally regulated institutions, provincial regulators will soon follow. The time to prepare is now. Proactively addressing climate risks will strengthen your institutions resilience and safeguard its future.
What is the SCSE and why it matters to credit unions
The SCSE is a regulatory framework designed to help financial institutions assess their exposure to climate risks such as wildfires, floods, and extreme weather. By running standardized models, institutions can quantify how these events might impact their assets and future lending decisions. While credit unions are not yet required to comply, it’s essential to understand that these changes are coming as part of prudent, forward looking risk management practices.
Climate risk and climate related events aren’t a matter of if but when. This isn’t just another compliance task, it’s about long-term business resilience and preparing for a future with more frequent climate events.
How will this impact your credit union
Although provincially regulated, credit unions have typically followed the federal regulator’s lead. The SCSE framework offers a clear model for managing climate risk, providing insight into how extreme weather events could affect your lending portfolio. By preparing now your credit union can strengthen its resilience, train teams on new risk management strategies, and implement tools that will help you stay ahead of regulatory requirements.
Taking proactive steps now will ensure you’re prepared when climate risk reporting becomes mandatory, positioning your institution for success in a changing regulatory landscape.
Quantifying climate risk: Transition and physical risk
Credit unions need to address two key categories of climate risk:
Transition risks –– Emerge from shifts in regulations, public policy, and market behaviour, such as the increasing focus on reducing carbon emissions or implementing carbon pricing. These changes can affect the long-term viability of industries your credit union lends to, impacting their ability to repay loans.
Physical risks –– Involve the direct impact of climate events like wildfires, floods, or severe storms, which can threaten your assets or member operations. These risks must be quantified to ensure your credit union can assess potential financial losses and adjust lending strategies accordingly.
Once you have detailed data embedded into your day-to-day operations, the SCSE gives you more tools to manage risk, like modifying the Expected Credit Loss (ECL) calculation to incorporate specific climate risk shocks and mapping your assets to flood zones and wildfire areas. This helps in forecasting exposure and preparing for regulatory requirements.
Understanding both these types of risks and their financial implications will allow your credit union to make informed lending decisions, protect assets, and safeguard its long-term financial stability.
The path forward: Proactive preparation
Preparing for climate risk now can set your credit union apart and help you navigate future regulatory challenges with confidence. By assessing your current exposure, adjusting your models, and integrating climate risk considerations into your overall risk management strategy, you’ll be better equipped to respond to upcoming changes in provincial regulations.
Acting early ensures that when compliance requirements arrive, your institution will be ready to meet them without disruption. Staying ahead of the curve not only helps with regulatory readiness but also supports building a resilient, forward-thinking organization capable of thriving in an increasingly climate-conscious environment.
Contact us
Ancheng Luo
Partner
[email protected]
647-775-1762
Edward Olson , CIA, CPA, CA
Partner, Enterprise Risk Services & Leader, Environmental, Social & Governance
[email protected]
250-763-8919
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