OTTAWA -- Canada's bank regulator has issued a framework to guide banks and insurance companies in protecting themselves against climate-related risks.

Climate change has the potential to harm the safety of the Canadian financial system, the Office of the Superintendent of Financial Institutions (OSFI) said in a press release Tuesday.

It urged federally regulated financial institutions to implement governance and accountability structures that account for climate-related risks.

"The financial risks associated with climate change ... have the potential to significantly impact the safety and soundness of individual financial institutions under our supervision, and more broadly, could affect the stability of the Canadian financial system as a whole," said Stephane Tardif, managing director of OSFI's Climate Risk Hub.

Tardif said one of the main concerns is the risks associated with economic transition.

"What happens if the country does not meet those targets?" he said.

Tardif noted the Canadian economy is also susceptible to policy actions in other jurisdictions.

"We're so dependent on exports, particularly in our extraction sectors and oil and gas sectors, that you could see our economy being impacted by what other jurisdictions are doing to try to reduce their emissions as well," he said.

The guidelines will take effect in 2024 for large banks and in 2025 for other regulated financial institutions.

The regulator said it reviewed 4,300 submissions from a wide range of respondents, including financial institutions, before publishing the document.

The Canadian Bankers Association, a lobby group representing more than 60 domestic and foreign banks operating in Canada, said it is assessing the guidelines and working to understand the directive's implications.

"Climate change is a critical issue of our time and banks in Canada are committed to doing their part to address it," said spokesperson Mathieu Labreche in an email.

"That's why banks are taking real action to address climate-related factors, evolving their risk management frameworks and accelerating clean economic growth through combined efforts with their peers, industry sectors, governments, and civil society."

While the framework calls for regulated institutions to set aside funds to account for climate-related risks, it does not mandate specific targets for them to meet.

Tardif said the guidelines are purposely not "rules-based." Instead, OSFI is directing financial institutions to quantify the climate-related risk they face, collect data and conduct scenario analyses, before providing the regulator access to that information.

"It's not prescriptive. We're very deliberate in that because if we give institutions a target, then they will just manage that target," he said.

"We've actually asked for mandatory climate-related disclosures. The fact that they're mandatory is going to help us benchmark institutions against each other on how they're managing the expectations."

This report by The Canadian Press was first published March 7, 2023.