Climate-report Doubts Put Canadian Banks and OSFI on Defensive — What Investors Should Watch

Immediate shock: an advocacy group’s open letter lands on banks and regulator

On Dec. 5, 2025, the Friends of Science Society published an open letter that questions parts of Canadian banks’ climate-risk analyses and the Office of the Superintendent of Financial Institutions’ (OSFI) public praise for those reports. The letter argues that at least one bank report relies on an economics paper that has since been retracted. That allegation, if true, touches on two things investors care about most: the quality of banks’ risk models and the reliability of the regulator that evaluates them.

Why the fuss matters now: climate-risk disclosures are used by banks to justify capital plans, influence stress tests and reassure markets about future losses from extreme weather and transition risk. A claim that these outputs rest on a withdrawn academic study makes the underlying assumptions suspect and could force fresh scrutiny of both bank disclosures and OSFI’s prior endorsements.

What the Friends of Science Society alleges

The open letter names several recent climate-risk reports and accuses them of drawing on an economic paper that was later retracted. The group says OSFI publicly commended some of those bank reports, implying regulatory approval of methods that may have been built on flawed research. The letter was dated Dec. 05, 2025 and sets a tight timeline of concern: the banks’ disclosures followed the academic study; the paper was retracted afterwards; the regulator lauded the disclosures without highlighting that reliance.

The advocacy group cites the text of the bank reports and the regulator’s statements as evidence, noting specific passages where the paper is referenced or used to support modeling choices. It also points to the public record of the paper’s retraction to argue that a key stepping stone for the reports has been removed from the literature.

What the letter does not do—at least in its public form—is provide an independent, full re-run of the banks’ models. It raises doubts and points to citations, but it stops short of saying how much of the banks’ reported outcomes would change if the contested paper were stripped out of the inputs.

OSFI and the banks in focus: likely reactions and stakes

OSFI has historically praised stronger climate reporting by banks as an important step for market discipline and risk management. If OSFI did publicly endorse reports that in turn relied on flawed research, the regulator will face pressure to explain what it reviewed and why it was comfortable with the conclusions at the time.

For the named banks, the immediate imperative is to be transparent about methodology and citations. That typically means reissuing clarifications, explaining the role any single paper played in a broader modeling framework, or commissioning internal or external checks. If the banks’ disclosures are robust and rest on many inputs and conservative assumptions, they can reduce the reputational damage. But if the contested paper materially influenced loss estimates, provisioning strategies or capital planning, the banks will need to say so quickly.

Expect a staged response: brief public statements from banks outlining that they stand by their disclosures or will review them; a more detailed follow-up if gaps surface; and, at a minimum, an OSFI statement about whether it will open a formal review. The regulator can choose to treat this as a reputational matter or as a trigger for a deeper supervisory inquiry—both have different market implications.

Why a retracted academic study can matter for climate-risk models

Academic work often informs scenario design, parameter choices and the economic linkages inside risk models. A retracted paper matters because it removes one piece of the intellectual scaffolding that modelers use to turn climate scenarios into dollar-value outcomes. If a bank relied heavily on a single research result to estimate, say, credit losses tied to a transition scenario, and that result is pulled, the confidence in that estimate shrinks.

That said, good practice in large banks is not to hang an entire forecast on a single paper. Banks normally combine empirical studies, proprietary stress scenarios, and conservative overlays. Where the problem can arise is if a paper provided a convenient, widely-cited calibration and was adopted across several institutions and by the regulator. That creates correlated model risk: many players making the same mistake at once.

The episode also raises governance questions. Who inside the bank validated the academic inputs? How were sensitivity checks performed? Did boards and risk committees get clear briefings on model limitations? Answers to those questions will shape whether this becomes a technical fix or a broader governance story.

Investor takeaways: what could move and how quickly

In the short term, the market reaction will depend on two things: the clarity of initial bank statements and whether OSFI signals a formal inquiry. If banks show clear, credible defenses—such as proof that the contested paper was a minor input—equity and credit markets may shrug. If doubts persist, expect modest downward pressure on bank shares and slightly wider bond spreads, especially for institutions perceived as most exposed to climate-related credit risk.

In the medium term, the controversy could matter for capital planning and stress testing credibility. If supervisors demand re-runs of scenarios or insist on stronger capital buffers to cover model uncertainty, banks may face higher regulatory capital expectations or more conservative guidance. That would weigh on return-on-equity expectations and could lower valuations across the sector.

Analysts and fixed-income investors will watch disclosures around sensitivity testing and any incremental provisions. The real market lever is credibility: once the market doubts a regulator’s endorsement, priced-in confidence in forward-looking metrics becomes harder to sustain.

What comes next and who to follow

Expect a short sequence: banks issue statements or clarifications; OSFI says whether it will open a supervisory review; independent analysts or academics may attempt re-analyses to quantify the impact of removing the contested paper; and, depending on findings, banks could update their reports or models.

Key players to watch are the regulator’s public notices, the investor-relations pages of the banks named in the letter, and filings where banks disclose risk-model changes. Market-watchers should also monitor credit-default-swap spreads and issuance behavior for any early signs of stress. For reporters and analysts, the pressing open questions are how central the retracted paper was to outcomes, what governance steps were taken before publication, and whether the regulator’s prior praise reflected a deeper methodological review or a more general endorsement of transparency.

For investors, the honest short verdict is this: the story is primarily about credibility, not an immediate solvency shock. But credibility matters for capital rules, market pricing and confidence. That makes the next few public clarifications and any formal supervisory actions worth watching closely.

Sources

• prnewswire.com