Moody’s supports OSFI’s Standardized Climate Scenario Exercise (SCSE)

Key takeaways

1. The Standardized Climate Scenario Exercise (SCSE) is an initiative by the Office of the Superintendent of Financial Institutions (OSFI) in Canada. The SCSE aims to measure climate risks that are not reflected using traditional risk quantification techniques.
   
   
2. The SCSE involves forward-looking climate scenario analysis, which is a tool used to assess the financial impacts of different potential future climate states.
   
   
3. Moody’s supported the SCSE by providing results from our climate-adjusted credit model.  This enabled OSFI to develop macro-financial risk factors for the three forward-looking transition scenarios used in the SCSE.
   
   
4. This multifaceted methodology enhances the robustness of climate risk modeling, accommodating model uncertainty and facilitating nuanced sectoral insights.
   
   
5. Through the SCSE, financial institutions gain access to standardized metrics and methodologies for assessing transition and physical climate risks, promoting industry-wide transparency and accountability.

What is the SCSE?

Climate risk quantification is a fast-developing field. Financial institutions and regulators in many jurisdictions are trying to better understand their exposure to climate risks through climate scenario analysis.

The Office of the Superintendent of Financial Institutions (OSFI) in Canada initiated the Standardized Climate Scenario Exercise (SCSE), an initiative designed to refine climate risk assessment within the financial sector. The SCSE serves as a starting point aiming to enhance both OSFI’s understanding and that of Federally Regulated Financial Institutions (FRFIs) regarding the risks. This exercise encourages FRFIs to design and develop the foundational infrastructures necessary for identifying and quantifying climate risk in their financial exposures.

Why is the SCSE important?

Recognizing the complexity of climate-related risks, the SCSE seeks to foster a deeper understanding among banks and financial institutions of the potential exposures stemming from climate change. The SCSE aims to standardize the approach to assessing climate risks across Canadian financial institutions, addressing key areas such as:

 
Awareness and strategy:

• The SCSE provides a structured approach for institutions to identify and quantify their climate risk exposures, facilitating more informed decision-making and strategic planning. This helps to raise awareness about potential climate risks and encourage strategic planning.

Capacity building for climate scenario analysis:

• The SCSE aims to enhance institutions' ability to conduct climate scenario analysis. The SCSE includes training and resources to build the technical capacity of financial institutions, helping them to accurately assess and manage climate-related risks in their portfolios.

Forward-looking assessment of physical and transition risks:

• The SCSE aims to establish a standardized framework for quantifying both transitional and physical climate risks. The SCSE uses a consistent set of metrics and methodologies to ensure comparability across institutions, promoting transparency and accountability in climate risk reporting.

How did Moody's support the SCSE?  

Moody’s supported the development of macro-financial risk factors with our credit modelling capabilities.

• OSFI leveraged scenarios and data from the Bank of Canada and Moody’s, which are based on the NGFS-GCAM sectoral transition pathways. Moody’s supported the SCSE by providing climate-adjusted probability of default values derived through our flagship credit risk solution. Moody’s sector-specific climate credit modelling builds on the approach adopted by GCAM. This solution applies our time-tested models to reliably assess the financial resilience of rated and unrated public and private companies, globally. This aided OSFI in developing macro-financial risk factors for the three transition scenarios.
• FRFIs will use the risk factors prescribed by OSFI for the three transition scenarios, as referenced in the table below:
   

What’s next: OSFI’s B-15

The closure of the SCSE coincides with OSFI's emphasis on climate risk management through its B-15 guideline for federally regulated financial institutions. This guideline actively requires these institutions to incorporate climate-related risk considerations into their risk management frameworks.

Having supported institutions during the SCSE, Moody’s is well-positioned to assist Canadian financial institutions now facing similar regulatory requirements. The emphasis of B-15 on employing climate scenario analysis for in-depth climate risk assessments aligns with the expertise Moody’s has developed through its previous engagements with regulators and banking customers. This expertise positions Moody’s as a capable partner for insurers navigating the complexities of integrating comprehensive climate risk assessments into their operational frameworks.

To learn more about how Moody’s is helping financial institutions comply with B-15, view our recent webinars.

• Navigating OSFI's B-15 Guidelines and Regulatory Expectations
• Climate Reporting Challenges Amid Changing Regulatory Landscape

Climate risk is a business risk

Climate risk is complex, and it's important to understand the impact it can have on your bottom line. Understanding the complexity of climate risk can improve the speed and quality of your organization's decision making. Here’s how we help financial institutions:
 

1. Navigate the interconnected risks of climate change

• Develop a holistic view of climate risk and act with confidence by considering the impacts of climate risk on credit ratings, debt markets, global macroeconomic outlooks, and market competition.
   

2. Stay ahead of physical climate-related costs and disruption 

• Quantify the financial costs of potential damage and disruption to your facilities, infrastructure, or customer assets from climate events.

3. Plan through the transition to a lower carbon economy

• Evaluate the potential effects of emerging policies and regulations, new competition, changes in your supply chain, and evolving shareholder and customer demands.

Climate risk management: Moody’s success stories

US Bank with C&I and CRE asset classes:

• Moody’s partnered with the financial institution to conduct analysis of climate scenarios across different types of assets. This helped the bank understand how climate risks, under various scenarios and hazards, can lead to potential losses, at the asset level.

EMEA Bank with Retail and CRE asset classes:

• Moody’s developed a climate risk analytics and reporting solution to help the institution identify and measure risks and opportunities related to climate change under a range of scenarios across different time horizons.

Moody’s Climate Scenario Analysis Solution for FIs

Moody’s offers workflow solutions, data, and analytics that provide a comprehensive view of physical and transition risks. Our capabilities integrate climate risk analytics into credit models across banking workflows, allowing customers to seamlessly incorporate climate risk into their existing processes for lending, portfolio risk management, stress testing, regulatory reporting, and investment decisions.