Learnings from the Standardized Climate Scenario Exercise (SCSE)

Bringing together such a wide spectrum of the Canadian financial industry has significantly raised awareness about climate-related risks and strengthened the industry’s ability to quantify these risks. The SCSE revealed critical gaps in climate risk data, infrastructure and expertise that need to be addressed to enable decision-useful climate scenario analysis. These gaps are particularly evident among smaller institutions, many of which had little to no prior experience in this area. While SCSE was not meant to comprehensively size the impact of climate-related risks to the Canadian financial industry, it did highlight areas of potential vulnerabilities and missed opportunities that warrant deeper, portfolio-specific assessments.

In this article, we will examine:

• Scope of the SCSE, as a refresher to what was covered in the exercise
• Key results from the physical and transition risk assessments
• Practical actions financial institutions should take to address identified gaps and build more robust climate scenario analysis capabilities

Scope of SCSE 

Physical risk assessment results

Coverage

• Flooding- $904 billion in mortgage and real estate assets and $3 trillion in insured property values within specific Forward Sortation Areas (FSA) across 11 urban regions.
• Wildfire - $27 billion in mortgage and real estate assets and $359 billion in insured property values within specific Forward Sortation Areas (FSA) across 7 rural regions.

Results

• By 2045, Deposit Taking Institutions (DTIs) and Property & Casualty (P&C) insurers could see an average of 10% – 12% of exposures located in high-risk flood areas. Smaller institutions with more regional exposure could see more than 50% in high-risk flood areas.
• Commercial real estate exposures tend to be more exposed to flood risk than residential exposures, possibly due to their location and characteristics.
• Most DTIs could see an average of 9–11% of their exposures with high Loan-To-Value (LTV) ratio in high-risk flood areas by 2045. DTIs with less geographically diversified exposures can be as high as 43%.
• For DTIs, exposures in high or very high wildfire risk zones could rise from 16% under current conditions to 29% by 2050. P&C insurers could see an increase from 19% to 33%.
• This rise in wildfire risks is not uniform across regions e.g.  Northern Alberta region could see a 204% increase while Northern Saskatoon may face a 31% increase.

Management of physical risks

• 12% of DTIs collect information on flood insurance coverage on property used as collaterals, leaving them with limited visibility if coverage lapses or become unavailable during the loan term.
• 70% of insurers have low reliance on reinsurance to manage flood risk, while around 10% cede most of their total insured value, making them heavily dependent on reinsurance.
• 9% of DTIs, 5% of life insurers, and 36% of P&C insurers provide clients with information on protecting properties from floods or wildfires. Majority have no current plans to do so, representing a missed opportunity to support clients on climate adaptation measures.

Transition risk assessment results

Coverage

• The credit risk module covered $3.5 trillion in exposures, capturing 29% of the total balance sheet across all participating financial institutions.
•  Around 17% of in-scope exposures were in Transition Vulnerable Sectors (TVS) i.e. fossil fuels, energy-intensive industries, agriculture and forestry, and air and other transportation.

Results

• Lifetime credit losses are projected to be 43% higher in the delayed transition scenario, reflecting the financial shock of a sudden and costly adjustment to meet climate targets within a short timeframe. This transition scenario reflects the current policy environment.
• Most of these losses come from TVS, potentially driven by shrinking profits, growing stranded assets and slow adaptation of carbon-intensive operations.

Practical actions for financial institutions

Advance location and industry classification

The SCSE helped develop the industry’s “classification muscle”. Before the exercise, 28% of DTIs, 20% of life insurers, and 73% of P&C insurers had experience with geocoding exposures while 62% of DTIs, 47% of life insurers, and 45% of P&C insurers had experience with industry and location mapping suitable for transition risk assessments.

Financial institutions should focus on improving the accuracy and completeness of their exposure classification to enable more accurate assessments and clearer understanding of asset-level vulnerabilities.

• Review assumptions and approximations used for mapping exposures for the SCSE and determine where higher quality data should be obtained, either from directly engaging clients or using trusted third-party data providers
• Extend the geocoding and industry classification to other exposures in your portfolio, starting with the most material exposures not yet covered.
• Implement validation processes and mapping tools to ensure consistency across the institution

Address data and infrastructure needs

26% of DTIs, 25% of life insurers, and 12% of P&C insurers reported having suitable data to support reliable climate risk assessments. The SCSE highlighted critical data and infrastructure gaps that require urgent attention such as:

• Reliable geospatial data (e.g. floodplain and wildfire hazard maps) to support asset-level physical risk assessments
• Property insurance coverage data to track risk transfer capacity during the loan term
• Emissions and energy efficiency data (e.g. counterparty level emissions, property-level heating and power source) to better capture transition risks

Financial institutions should perform a data gap assessment to ascertain data needs, challenges with data collection and limitations in IT infrastructure. This assessment should deliver a holistic remediation plan that captures synergies from aligning related projects conducted across the institution. Strong governance on this plan is key to ensure clearly defined responsibilities, efficient resource allocation and close progress monitoring.

Support to build capacity

The SCSE helped build foundational expertise and raised awareness of climate risks. As financial institutions build on this exercise to develop internal climate scenario analysis frameworks, it is important for internal teams to have the right skills and expertise. Identifying knowledge gaps and developing well-supported development plans is essential for upskilling. Practical ways to build internal capacity include:

• Targeted training programs to strengthen technical expertise
• Cross-functional internal working groups to share lessons learned, align approaches, deepen collaboration and build a common understanding
• Participation in industry initiatives to learn from peers and stay current with evolving climate risk practices
• Leverage external experts and service providers to fill internal gaps and accelerate capacity building

Financial institutions should also support clients build their climate risk management capacity, through innovative sustainable products & services, guidance materials, and practical tools. This creates value for clients, can be a source of competitive advantage and enables institutions strategically manage their own exposures, as better-prepared clients reduce overall climate risk.

Readiness for regulatory scrutiny

Although there are no immediate plans to conduct another regulatory climate scenario exercise, OSFI and AMF highlighted the SCSE findings will inform supervisory expectations and review activities going forward. Areas flagged for closer attention include:

• Targeted supervisory engagement with institutions with material concentration in high-risk areas
• Institutions’ ability to use data-driven approaches to measure and adequately price catastrophic and climate-related risks
• Dependency on reinsurance and stress testing insurers’ ability to absorb climate-related losses
• Integration of physical risks into supervisory review of institutions’ capital models

Financial institutions should start embedding climate risk assessment practices into their compliance and risk reviews as they prepare for greater regulatory scrutiny. They also need to be ready to file the new climate risk return, which requires granular location and counterparty level emissions data. Federally regulated financial institutions have until 180days of fiscal year-end to complete this return.

How can we help

Our team of experienced specialists deliver pragmatic and tailored solutions to help clients advance their internal climate risk modelling capabilities in line with regulatory expectations and best practices. With our in-house CliMate tool, we enable financial institutions to quantify physical and transition risks across multiple climate scenarios with confidence and clarity. Get in touch to learn more or to speak with a member of our team about how we can support your journey.