Governor of the Central Bank of Ireland (CBI), Gabriel Makhlouf, outlined in a Dear CEO letter dated 3 November 2021, the supervisory expectations of regulated firms in context of climate and other ESG issues, shortly after COP26 commenced on 31 October 2021.

In the context of the 26th UN Climate Change Conference in Glasgow (COP26), the Governor endorsed the ‘Glasgow Declaration’ and announced the CBI’s intention to play its part in the change process alongside the financial services industry. It is irrefutable that climate change action is not solely the responsibility of governments. Businesses, regulators, customers, and clients each have a role to play.

To facilitate engagement with the financial services sector, the CBI has announced that it will establish a Climate Risk and Sustainable Finance Forum (the Climate Forum) made up of various stakeholders. Governor Makhlouf indicated that the first meeting will take place in the first half of 2022 and more details will be made available soon. It is likely to be made up of representatives of banks, insurers, asset managers and investment intermediaries.

Climate considerations are a key component of the ESG agenda that the EU is seeking to address, through its sustainability package of regulatory reforms. Accordingly, engagement with the CBI on this issue will be important in context of various sustainability regulations including:

• Taxonomy Regulation

• Sustainable Finance Disclosure Registration, and

• Other relevant European Supervisory Authority requirements and future regulator expectations.

The CBI’s approach is aligned to the requirements under the EU framework, as well as with developments and relevant rulebooks at EU level for banks, insurers, and asset management firms. Amongst its role and function is to ensure the orderly operation of markets and wider market integrity, particularly in the development of sustainable finance and the prevention of ‘green washing’.

The supervisory expectations, set out in an Annex to the Letter, apply to all regulated firms as defined under Section 2 Central Bank Act 1942. These are to be applied in a proportionate manner. The CBI’s expectations at this stage are not binding or prescriptive in nature and are based on international best practice.

The supervisor expectations focus on 5 key areas:

1. Governance – board knowledge and autonomy in the areas of climate risk and promotion of a culture emphasising climate and other ESG issues

2. Risk Management Framework – ensure robust climate risk identification, measurement, monitoring and mitigation

3. Scenario Analysis - stress testing and impact assessments

4. Strategy and business model risk, and

5. Disclosures – full and transparent disclosure to all relevant parties including consumers and investors and ensure non-engagement in the practice of ‘green washing’.

Conclusion

Regulated financial service providers should take note of the CBI expectations regarding climate and other ESG matters as set out in the Letter. The Governor also flagged that the approach of the CBI will evolve and will be kept under review – including consideration of the need for sector specific guidance. As the timeline for the establishment of the Climate Forum is imminent, engagement in the forum will assist and inform the content of future specific sector guidance.

The real risk and impact of climate change is visible to all and resonates with each of us. The climate change movement is now escalating throughout all sectors and industries. In the context of the regulated financial service providers, engagement by all stakeholders in the financial services industry is important to achieve climate change action, develop sustainable finance and prevent ‘greenwashing’.

For more information read The Next Steps to Green Banking – Managing ESG Risks in the Banking Industry or Financial Regulation.

The content of this article is provided for information purposes only and does not constitute legal or other advice.