[co-author: Samuel Gaudreau, Articling Student]

On July 4, 2024, Quebec’s financial sector regulator, the Autorité des marchés financiers (AMF), published its Climate Risk Management Guideline (Guideline). The Guideline aims to build the resilience of the financial sector and financial institutions against climate-related risk. It also encourages financial institutions to include these risks in their integrated risk management processes.

The Guideline applies to insurers, financial services cooperatives, trust and savings companies, as well as other deposit institutions authorized by the AMF to do business in Quebec (financial institutions). It takes into account the most recent climate risk disclosure recommendations issued by various international standards bodies, including the Task Force on Climate-related Financial Disclosures, the International Sustainability Standards Board (ISSB), the Association of Insurance Supervisors, and the Basel Committee on Banking Supervision, all of which provide climate risk guidance. Among other things, the Guideline incorporates the ISSB’s new standards, IFRS S1 and IFRS S2, which are designed to enable companies to provide information about risks and opportunities related to sustainability and climate change.

Climate-Related Risks and Opportunities

In its Guideline, the AMF highlights the extent to which climate change risks and consequences could significantly impact financial institutions operating in Quebec. These risks are generally divided into two broad categories: “physical risks” and “transition risks.”

Physical risks are the direct consequences of increasingly frequent, unpredictable and severe extreme weather events such as floods, forest fires and gradual environmental degradation.

Transition risks stem from the transition to a lower-carbon economy. This transition occurs due to new government policies, stakeholders’ evolving decisions and behaviours, or emerging new alternative technologies.

In the event of a disorderly transition to a lower-carbon economy, physical and transition risks may give rise to several indirect risks, including liability and reputational risks, as well as financial risks, such as credit, insurance, liquidity, investment and market risks. Climate-related risks can threaten the long-term viability of a financial institution’s operations and business model.

While the Guideline addresses climate-related risks, the AMF notes that a transition to a lower-carbon economy can generate many opportunities, including expanding operations to new markets, reviewing investments and financial product offerings, and participating in new renewable energy projects.

The AMF’s Expectations Towards Financial Institutions

The AMF sets out several expectations for financial institutions:

1. Governance Expectations: The AMF expects the roles and responsibilities of board members and senior management to be clearly defined with respect to addressing climate-related risks.

The AMF expects financial institution boards to incorporate issues associated with climate-related risks into their organizations’ main action plans, integrated risk management policies, annual budgets and performance objectives. It also expects boards to oversee the progress made toward the objectives and targets related to these issues. In addition, the AMF expects senior management to integrate climate-related risks into their organizations’ risk appetite framework and internal controls. Senior management is also expected to establish clear processes for identifying climate-related risks and opportunities, as well as to oversee these processes (e.g., through a management committee).

Financial institutions are expected to assess the impact of climate-related risks on their short-term and long-term strategic, financial and capital planning, and to include these risks in their strategies by taking into account the lifecycle of their assets and infrastructure. Financial institutions should support their analysis of potential climate-related impacts and opportunities with quantitative information at several levels (e.g., business divisions, sectors and geographic locations) on their core businesses, strategy, products and services.

Lastly, financial institutions are expected to implement a transition plan aligned with their business plans, strategies and risk appetite. In designing such a plan, financial institutions should use progress indicators, such as GHG emissions. Transition plans should also include a description of climate-related risks and their impacts, based on various time horizons and climate scenarios.

2. Expectations on Integrated Risk Management: The AMF expects financial institutions to identify and assess the potential impacts of climate-related risks, as well as to implement mitigation measures. According to the AMF, financial institutions should integrate climate-related risks into their overall risk management and control framework, including their strategies, policies and procedures.

The AMF believes that, given their systemic nature, climate-related risks should be managed based on the scope and frequency of their impacts on a financial institution. The AMF expects financial institutions to adopt strategies that enable prudent management of their climate-related risks. It also expects them to document these strategies, to integrate climate-related risks into their internal control framework, and to use reliable data and relevant models in assessing and mitigating these risks.

3. Expectations Regarding Climate Scenarios and Stress Testing: The AMF expects financial institutions to conduct climate scenario analyses to assess the impact of climate risk factors on their risk profile, business strategy and business model.

These analyses should include plausible future scenarios to estimate the financial institution’s exposure to physical and transition risks. They should also identify relevant risk factors and assess the resilience of the financial institution’s business model. The results of these analyses should be integrated into the organization’s financial planning.

In addition to carrying out their own climate scenario analyses, financial institutions are expected to carry out standardized climate scenario exercises. The AMF may ask financial institutions to provide it with the results of these exercises. The exercises and their results will enable the AMF, in its supervisory role, to assess the overall exposure of financial institutions to physical and transition risks and to compare the various approaches used.

4. Expectations Regarding Capital and Liquidity Adequacy: The AMF expects financial institutions to maintain sufficient capital and liquidity to cover their climate risk exposures. Climate-related risks should be incorporated into financial institutions’ internal capital adequacy assessment and solvency assessment processes. When assessing the adequacy of the capital and liquidity buffers, financial institutions should consider a variety of severe yet plausible climate scenarios specific to them and their respective markets.

5. Expectations Regarding the Fair Treatment of Clients (FTC): The AMF expects financial institutions to treat their customers fairly by incorporating climate-related risks at all stages of a financial product’s lifecycle. Financial institutions should inform clients of the consequences of physical and transition risks related to climate change, as well as of the impact of extreme weather events on the products and services offered. Product design should rely on adequate information and ensure the resulting products are tailored to clients’ needs. Financial institutions should also ensure product advertising is accurate, clear and not misleading.

The AMF expects financial institutions to communicate its FTC expectations to the intermediaries through which they offer their products, given that intermediaries involved in product offerings are not directly subject to the Guideline.

6. Expectations for the Disclosure of Climate-related Financial Risks: The AMF expects financial institutions to publicly disclose in a consolidated manner the main elements of their governance and integrated risk management, as well as their climate scenarios and climate-related stress testing.

These disclosures should be made according to the following five principles advanced by the AMF: (1) providing relevant, comprehensive information specific to climate-related risks and opportunities; (2) providing information that is clear, balanced and understandable; (3) maintaining a neutral stance and disclosing reliable, verifiable and objective information; (4) disclosing information appropriate for the size, nature and complexity of the financial institution; and (5) ensuring that information is disclosed consistently throughout the financial institution’s various publications.

The AMF expects financial institutions to make these disclosures publicly available on an annual basis and no later than 180 days after fiscal year-end. Financial institutions should include in these disclosures their greenhouse gas emissions (as calculated according to recognized standards), a description of their climate-related targets and their performance against these targets.

GHG emissions and associated metrics should be provided for historical periods to allow for trend and progress analysis, if applicable. In their publications, financial institutions should provide a description of the methodologies used to calculate or estimate emissions and metrics.

Disclosure Timeline Based on Size and Type of Financial Institution

The Guideline took effect upon its publication in the AMF Bulletin dated July 4, 2024. However, specific expectations regarding financial reporting follow a disclosure timeline set out in Schedule 1 of the Guideline. Financial institutions have a period of 180 days following the stated fiscal year-end to comply with the deadlines provided in the timeline.

The deadlines vary for each of the financial institution groups (i.e., Group A or Group B), which are determined by, among other things, a financial institution’s size, complexity and net assets. The AMF will inform financial institutions of the group to which they belong.

Barring a few exceptions, the deadline for financial institutions in Group A to meet the AMF’s disclosure expectations is set at 180 days following the end of the 2024 fiscal year, whereas the deadline for financial institutions in Group B is set at 180 days following the end of the 2025 fiscal year.

The AMF’s expectations for the disclosure of Scope 3 GHG emissions, certain intersectoral metrics (such as the amount or percentage of assets or business activities that are vulnerable to climate-related risks, as well as those that are compatible with climate-related opportunities), and certain sectoral metrics set out in the IFRS S2 standard have been pushed back to 2025 for Group A and to 2026 for Group B.

Finally, the AMF’s expectations for the disclosure by financial institutions of their climate transition plan and the resilience of their strategy, taking into account various climate-related scenarios, remain to be determined.

Similarities with OSFI’s Guideline B-15

On March 31, 2023, the Office of the Superintendent of Financial Institutions (OSFI) published the initial version of Guideline B-15 – Climate Risk Management (B-15), which sets out OSFI’s expectations for federally regulated financial institutions’ management of climate-related risks. On March 20, 2024, OSFI updated B-15 to align it with the new IFRS S2 standard.

The Guideline is very similar to the new version of B-15, with the only significant difference being the AMF’s FTC expectations that are consistent with the AMF’s powers over business practices.