What would happen to billions of dollars in profits for bankers and insurance companies in a world that decides to take climate change seriously?

For the first time in Canada, a federal regulator is requiring the big banks and insurance companies to answer that question.

And it says it will hold senior executives at these institutions accountable for how they are managing the many possible climate-related risks to their businesses, like the destruction of homes and communities from extreme weather, the worsening of public health, the devaluing of high-polluting assets by climate laws and changes in consumer practices, and environmental lawsuits.

The Office of the Superintendent of Financial Institutions delivered this message through new rules released March 7 that require federally-regulated banks, insurance companies and pension funds to publish annual data about the emissions they’re linked with, and to come up with plans to manage the risks associated with the transition away from coal, oil and gas.

The regulator is an independent agency that oversees around 400 financial institutions and 1,200 pension plans. Its mandate is to protect lenders, insurance policy holders and Canadians who deposit money in bank accounts. It said the new rules were necessary for the public to maintain confidence in the financial system.

The five large Canadian banks have promoted different strategies to cut emissions and get clients to decarbonize, including signing on to a voluntary net-zero initiative. But all five also issued billions of dollars worth of loans and underwriting for fossil fuels in 2021, and some have pushed back against the idea that they should divest from high-polluting clients.

Here are five takeaways from the new rules:

What happens to Canadian banks and insurers in a 1.5 C world

Banks will have to show what will happen to their profits and revenues under a range of different future climate scenarios, including a future where countries have slashed emissions enough to hold the global average temperature increase to 1.5 C above pre-industrial levels.

This 1.5 C scenario is aligned with the Paris Agreement on climate change, which Canada has endorsed, and represents a critical threshold for the planet that leads to irreversible damage to ecosystems and the global economy.

But meeting it will require humans to dramatically slash greenhouse gasses such as carbon and methane, which could impact Canada’s oil and gas companies and any banks that continue to underwrite them. The International Energy Agency’s version of this exercise, which the regulator recommended the banks use, envisions no new oil and gas development.

Some Canadian banks have lobbied against mandatory disclosures of their internal scenario planning reports. Former Bank of Canada governor Mark Carney said last month that corporations and governments were undervaluing climate scenarios, and by doing so, ignoring public demand for climate action. The Canadian Bankers Association, which counts the big five banks as members, told The Narwhal they supported the principles and the approach taken by the regulator in its climate rules.

Canadian banks will have to account for emissions from their loans

The rules will require banks to calculate and then publish the carbon pollution associated with their products, such as business loans, auto loans, corporate bonds, commercial real estate or mortgages. Some Canadian banks also previously lobbied against this requirement.

Independent Quebec Senator Rosa Galvez called the regulator’s new rules a “good first step” in acknowledging how the climate crisis could disrupt banking operations. But she said in a statement that the rules don’t go far enough in recognizing the impact that financial institutions themselves have on the climate. Her proposed legislation, Bill S-243, the Climate-Aligned Finance Act, would hand the regulator more powers to force banks to align with climate commitments.

Rules come in advance of other corporate disclosure requirements

The rules don’t set a date for when scenario planning reports and climate transition plans will be required from Canadian banks and insurance companies, but it is likely to be within the next two years.

The regulator said it was waiting for a different set of international financial disclosure standards to be published this summer, after which point it will align the dates. An earlier draft version pegged 2024 as the start date.

Many Canadian firms are also listed in U.S. markets, where similar climate disclosure rules are being contemplated, while other rules are being put in place in the United Kingdom and the European Union.

Implementation and enforcement begin next fiscal year

Large financial institutions will have to start complying with the bulk of the new rules by the end of the 2024 fiscal year. The regulator said it will now start bolstering its oversight of Canadian banks and other institutions to ensure they’re following the rules when they kick in.

That begins with issuing a “mandatory self assessment questionnaire,” the regulator said, that will gauge how ready the banks are to comply. Then, if banks are not meeting the expectations, the regulator will send letters to their senior management and board of directors with recommendations.

If things continue to “escalate,” the regulator said it has the authority to issue letters that direct compliance, or request that institutions increase their capital if necessary.

Rules for Canadian banks won’t tackle ‘greenwashing,’ critics argue

The regulator won’t be asking banks to publish their climate-related information in certain key financial documents, such as a Report to Shareholders, instead allowing them to disclose it in standalone reports like an “environmental, social, and governance” report.

The legal non-profit Ecojustice said the rules won’t tackle “rampant greenwashing by Canada’s financial giants.” Climate program director Alan Andrews said in a statement that the regulator should be given the power to reject climate plans from banks that don’t include a credible path to 1.5 C.

Shift Action for Pension Wealth and Planet Health also said the rules fell short of what was necessary to stop financial institutions from destabilizing the climate and financial system.

Updated March 10, 2023, at 8:45 a.m. ET: This article was updated to add a statement from the Canadian Bankers Association.

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