The Central Bank recently issued a "Dear CEO" letter to regulated financial services providers regarding compliance with statutory and regulatory obligations on climate and broader environmental, social and governance (ESG) issues. The Central Bank views its mission to serve the public interest and sees addressing climate change as a strategic priority and that the financial system has to be resilient to the risks it poses as well as having an important role in servicing the needs of consumers in the wider economy and the transition to a greener future.
The letter issued on 3 November 2021, and describes the Central Banks expectations, noting that such will be applied in a proportionate matter aligned with the nature, scale and complexity of the regulated firm. The Central Bank also states that its own supervisory approach will evolve over time (in line with its own regulatory experiences and engagement with other stakeholders).
The letter focused on five clear areas it expects regulated firms to be able to address namely:
- Governance - Firms will need to be able to demonstrate clear ownership by their boards of climate risks affecting the firm and to promote a culture that places emphases on climate and other ESG issues
- Risk management framework - Firms needs to understand the impact of climate change and the risk profile of the firm and to enhance their existing risk management frameworks to ensure a robust climate risk identification, measurement, monitoring and mitigation
- Scenario analysis - scenario analysis and stress testing are required to assess the impact of potential future climate outcomes, including impacts on capital adequacy, where applicable
- Strategy and business model risk - firms are expected to undertake business model analysis to determine the impact of climate risks (and opportunities) on the firms overall risk profile, business strategy and sustainability, and to inform strategic planning
- Disclosures - The CBI emphasised the importance of transparent disclosure to consumers and investors regarding the regulated firms processes around climate and other ESG issues to protect consumer/investor interests and wider market integrity. The Central Bank stressed in particular that firms need to ensure they do not engage in the practise of "green washing"
The Central Bank made clear that it wishes to facilitate engagement and will established a climate risk and sustainable finance forum to bring together stakeholders to share knowledge and understanding of the implications of climate change for the Irish financial system and to enable sharing of best practise and embedding climate risk and sustainable finance considerations within firms.
The Central Bank also formally indicated its desire to play a part in the change process along industry and other Central Banks and supervisors to share international best practise on climate and sustainability issues in the financial system and have formally endorsed the "Glasgow Declaration" reaffirming its commitment to international cooperation in addressing the challenged posed by climate change.
The letter emphasises the requirement on regulated firms to take account of their approach to climate sustainability and ESG issues generally and to ensure that climate change is included as a risk factor in their approach to their businesses going forward. It is clear that the CBI recognises this is an evolving area and that the precise requirements it may impose in the future are not as yet determined and when decided upon will be phased in.
About the author
Daniel Cashman
About Daniel
Daniel is partner and head of our banking & finance team. Daniel works with Irish and international financial institutions and has broad expertise in corporate lending, including acquisition finance, construction finance, project finance and secured lending.