OSFI should get back in its lane: finance, not climate policy

OSFI should get back in its lane: finance, not climate policy

Regulator wants to supervise climate reactions and the character of corporate officers. That’s not going to go well

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The Office of the Superintendent of Financial Institutions (OSFI) is indulging in regulatory overreach by requiring highly implausible climate risk disclosure and imposing “integrity-based” oversight, with negative implications for the efficiency of the financial system, which should be a top priority.

OSFI is an independent agency of the federal government. Its mission is to promote consumer confidence, manage risk and regulate and supervise over 400 financial institutions, including banks and insurance companies, federal trust and loan companies and 1,200 pension plans. How it pursues its mandate impacts these institutions’ operations, cost and competitiveness.

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The first problem relates to OSFI’s “Climate Risk Management Guideline B-15,” which applies to over 350 financial institutions, including chartered banks. It requires them to regulate and manage the physical and transitional risks of climate change. Transitional risks relate to Ottawa’s goal of a net-zero GHG emissions economy. As responsible organizations, these institutions worry about the future as a matter of course. What makes OSFI oversight unrealistic is that the climate scenarios it insists institutions consider are based on the UN’s “Representative Concentration Pathway (RCP) 8.5,” basically a worst-case scenario.

The Intergovernmental Panel on Climate Change, the UN body for assessing the science related to climate change, has said the likelihood of 8.5 is “low,” which actually overstates its probability. It assumes a five-fold increase in global use of coal by 2100 and cessation or even reversal of all government green initiatives. Neither is remotely possible. As a result, RCP 8.5 has far less than a one per cent probability, according to the U.S. Environmental Protection Agency, and it is therefore no longer used by the Biden Administration. Ottawa’s stubborn reliance on RCP 8.5 does not require or even justify an arms-length crown corporation to impose unrealistic assumptions on forecasting exercises it is requiring 350 institutions to conduct.

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Mandating companies to publicize the effects of far-fetched and misleading risks is inconsistent with the “full, true and plain” disclosure required by provincial securities acts. It could erode their credibility with investors, increase the cost of capital and lead to misinformed corporate decision-making, all of which would waste scarce resources and put Canada at a competitive disadvantage. In the next few years, OSFI may increase capital requirements to reflect perceived elevated climate risks — this in addition to what has already been required under “Basel IV” international agreements.

Last week, Superintendent of Financial Institutions Peter Routledge commented on the “inevitable increase in catastrophic costs that will come with climate change,” although on disclosure he said: “I don’t mind being in the middle.” Mind you, positioning in the middle of an alarmist crowd is not a terribly moderate location.

A second problem is OSFI’s new “Integrity and Security Guideline,” which is designed to protect against threats that would undermine public confidence in the financial system. It’s certainly true that bad actors can seriously damage a company’s performance, sully its reputation, harm third parties and even put the financial system at risk. So everyone can agree that “Responsible persons and leaders are of good character and demonstrate integrity through their actions, behaviours, and decisions.” But since that is a “guideline” expectation, it effectively extends OSFI’s role to overseeing hiring, retention and promotion decisions based on the character of employees and board members. While personnel practices are not prescribed — so far — employers will inevitably be subject to second guessing if things go awry, and potentially even if they don’t.

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A related principle states that “Culture should be deliberately shaped, evaluated, and maintained… This said, there is no ideal culture; sound culture depends to some extent on context. All cultures, however, should reflect a commitment to norms that encourage ethical behaviour.”

These are noble (if nebulous) principles, but it is fraught when a regulator, and by extension government, starts supervising ethical behaviour. What if a board member or senior manager expresses reservations about the economic and social costs of net-zero, advocates for the development of oil and natural gas or opposes DEI policies for moral or practical reasons? Some senior government officials and public servants would likely impugn the integrity and ethics of people with those views.

As we know, today’s enthusiasm for diversity rarely extends to divergent opinions. Environment and Climate Change Minister Steven Guilbeault has threatened Saskatchewan Premier Scott Moe with criminal sanctions if Saskatchewan burns coal after 2030, while a new NDP private member’s bill would impose jail time for  “promotion” of fossil fuels. (It is remarkable how quickly the unimaginable can become the unassailable.)

Canada has a well deserved international reputation for competent, sophisticated and prudent regulation of its financial sector. OSFI risks jeopardizing its core mission if it strays from its lane and succumbs to regulatory overreach.

Joe Oliver was first minister of natural resources and then minister of finance in the Harper government.

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