Proportionality in Climate Risk Management for Small and Mid-sized lenders

Abstract: Canadian regulators such as OSFI and the AMF are urging all lenders to integrate climate risk into their risk frameworks, but for small and mid-sized lenders, success depends on proportionality—scaling climate practices to their size, complexity, and risk profile. Proportionality allows smaller institutions to focus on what matters most: defining clear responsibilities, targeting material exposures, using flexible and modular assessment tools, and developing practical sustainable finance offerings that reflect local needs and resource realities. By adopting proportional approaches, small and mid-sized lenders can not only meet regulatory expectations but also enhance their competitiveness and credibility in supporting Canada’s low-carbon transition.

Canadian lenders are under growing pressure from regulators, investors, and customers to embed climate risk management into their strategies and risk frameworks. The Office of the Superintendent of Financial Institutions (OSFI) and the Autorité des Marchés Financiers (AMF) now require lenders to adopt a risk-based approach to identifying, assessing, and managing the impacts of climate-related risks and opportunities.

For climate risk practices to be both meaningful and manageable, they must be applied proportionately i.e. scaled to the size, complexity, and risk profile of each lender. Proportionality is particularly important for small and mid-sized lenders, which operate with leaner teams, fewer resources, and more concentrated exposures than their larger peers. With the right approach, proportionality can enable smaller institutions to be more focused, efficient, and agile as they integrate climate considerations into strategy and decision-making.

What proportionality looks like in practice

• Clear roles and responsibilities

In smaller institutions, climate risk oversight tends to be absorbed into existing executive and risk functions rather than handled by dedicated Climate/ESG teams. This creates challenges such as:

• Individuals may be stretched thin, wearing multiple hats
• Knowledge gaps as climate risk may not fall within their core area of expertise
• Accountability for climate considerations can “fall through the cracks

It is therefore essential for climate-related responsibilities to be clearly defined, formalized, and supported with targeted upskilling. When accountability is defined, even within broader mandates, climate considerations can be better embedded and not be an afterthought.

• Focus on material exposures

As not all parts of a lending book are equally vulnerable to climate risks, it is not practical or efficient for lenders to spread efforts across immaterial risks. Materiality assessments are essential to identify climate-related risks and opportunities that matter most. For instance, a credit union in British Columbia may prioritize its mortgage portfolio in flood-prone areas or a trust company might focus on exposures to carbon-intensive industries.

In conducting materiality assessments, small and mid-sized lenders should not only assess individual exposures in isolation but also account for aggregation effects, where multiple smaller risks may combine to create material impacts. Assessments should also account for time horizons, as risks that are immaterial today can escalate over the medium or long term.

• Flexible and modular assessments

Climate risk assessments often start with qualitative tools like heat maps and exposure screens. Over time, these evolve into more quantitative approaches. Small and mid-sized lenders tend to adopt a flexible, modular approach:

• Leveraging publicly available or regulatory scenarios (e.g., NGFS or OSFI’s SCSE) with light customisation to reflect regional specifics.
• Adapting existing credit risk models (e.g., IFRS 9 models) by layering in climate-relevant variables rather than building new systems.
• Using proxy data from industry or regulatory sources where client-level information is scarce or costly to obtain.

This approach allows smaller lenders to generate actionable insights without investing in complex bespoke models used by larger lenders. Still, simplicity must not mean superficiality. Assessments must remain rigorous enough to inform concrete actions on credit policy, product design, and risk mitigation.

• Sustainable finance products and services

Larger lenders typically offer a broad suite of sustainable finance offerings that can be tied to sophisticated KPIs and supported by advanced data platforms. This includes green bonds, sustainability-linked loans, complex transition financing. By contrast, small and mid-sized lenders tend to focus on simpler, standardized products closely aligned with clients’ immediate needs such as green mortgages, EV financing or retrofit loans for businesses.

While small and mid-sized lenders may lack in-house sustainability specialists or advanced analytics, they can adopt a more practical and community-focused approach. This includes:

• Leveraging partnerships with government programs, fintechs, and third-party providers to reduce the cost of product development and monitoring
• Embedding sustainability features into existing products, such as preferential rates for energy-efficient mortgages, rather than creating entirely new offerings
• Leverage close client relationships to provide advisory services through awareness campaigns, workshops or helping to navigate government green incentives

Next steps

Small and mid-sized lenders can turn proportionality into a competitive advantage, but this requires deliberate action:

• Build a holistic roadmap: Map where you are today and what data you need to identify gaps and suitable remedial actions. Ensure this work is cross-functional and not siloed.
• Be ready to invest: Build tools, skills, and internal capabilities needed to manage climate risks. Also, develop services to support clients build their climate risk capacity.
• Collaborate to accelerate progress: Work with industry associations (e.g., CLA), networks, and third-party experts to share knowledge and best practices.

Done well, robust climate risk management goes beyond meeting regulatory expectations. It can serve as a strategic lever that strengthens resilience, unlocks new opportunities, and positions small and mid-sized lenders as trusted partners in Canada’s transition to a sustainable economy.

5 Key Points

1. Proportionality as a Guiding Principle – Climate risk management should be scaled to a lender’s size, complexity, and risk exposure, ensuring that efforts remain practical and value-adding rather than burdensome.

2. Clear Accountability and Upskilling – Smaller institutions should define and formalize climate-related responsibilities within existing executive and risk functions, supported by targeted training to close knowledge gaps.

3. Materiality-Driven Focus – Lenders should concentrate on portfolios most exposed to climate risk (e.g., flood-prone mortgages or carbon-intensive industries) and account for aggregation and long-term effects in their assessments.

4. Modular, Cost-Efficient Assessments – Instead of complex bespoke models, smaller lenders can adapt existing credit tools, use public scenarios, and leverage proxy data to produce actionable insights efficiently.

5. Community-Focused Sustainable Finance – By embedding green features into existing products and partnering with government and fintech programs, small and mid-sized lenders can deliver meaningful sustainability offerings aligned with client needs and community impact.

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