Irish Central Bank emphasises climate-related expectations for financial firms

In the letter to regulated financial services providers (7 page / 4.41MB PDF), governor Gabriel Makhlouf set out the bank’s supervisory expectations with regard to sustainability. These focus on five key areas: governance; risk management frameworks; scenario analysis; strategy and business model risk; and disclosures.

The CBI’s supervisory expectations apply to all regulated financial services providers as defined by Section 2 of the Central Bank Act 1942.

Makhlouf said the CBI’s supervisory approach to climate and other environmental, social and governance (ESG) issues was aligned with, and informed by, regulatory developments at an EU level and the Network for Greening the Financial System (NGFS) framework for supervisory engagement.

In a related move, the CBI endorsed a declaration signed at the UN Climate Change Summit by the NGFS, reaffirming central banks’ commitment to ‘greening’ the financial system. It also said it would establish a Climate Risk and Sustainable Finance Forum to build a shared knowledge and understanding of the implications of climate change for the Irish financial system.

According to the open letter, the CBI’s supervisory objectives seek to promote high levels of trust and confidence in the financial system, ensuring that customers are treated fairly and consumer and investor interests are protected; pursue the orderly functioning of markets based on transparent and fair price formation; and ensure all regulated firms have sustainable business models, sufficient financial resources, are well governed and can recover if they get into difficulty.

Makhlouf said regulated firms should demonstrate clear ownership by boards of climate and ESG issues. Their risk management frameworks should ensure robust climate risk identification, measurement, monitoring and mitigation.

Firms should carry out scenario analysis and stress testing to assess the impact of potential future climate outcomes, and they should also undertake business model risk analysis to determine the impacts of climate risks on their overall risk profile, business strategy and sustainability.

The letter emphasised that disclosures which exist as a legal requirement are intended to protect consumer and investor interests and the wider market integrity. It said in particular, firms should not ‘greenwash’ any claims they make.

The CBI’s expectations should be applied proportionately, aligned to the nature, scale and complexity of each individual firm. Makhlouf said firms should seek independent legal advice if they are unsure of their own obligations.

Financial services expert Lisa Matthews of Pinsent Masons, the law firm behind Out-Law, said: “The recently published Intergovernmental Panel on Climate Change report emphasised the importance of taking urgent action to combat climate change. It is critical that all regulated financial services providers ensure that ESG is a key focus in their strategies and their day to day activities.”

Banking expert Ann Lalor of Pinsent Masons said: “It is greatly encouraging to see positive action in this area by Ireland’s financial services regulator as this can only further progress consistency in the market’s approach to sustainable finance.”