Climate Change: Central Bank outlines its supervisory expectations
On a day when finance is front and centre at COP26, the Central Bank of Ireland (CBI) has set out its supervisory expectations of regulated firms regarding climate change, and reaffirmed its own commitment to take action.
Addressing climate change has been moving up the CBI’s supervisory agenda for some time, and has become one of its strategic priorities. This was emphasised by CBI Governor Gabriel Makhlouf in the CBI’s letter to the Chairs and CEOs of regulated financial services providers (RFSPs), published this afternoon. Noting that RFSPs have a key role to play in climate transition, he stressed that all RFSPs need to increase their focus on both climate issues, and broader ESG issues.
The five key themes covered in today’s CBI letter are:
- Governance: the need for RFSPs boards to show clear ownership of climate risks, and to drive cultural awareness within their organisations of climate and ESG issues.
- Risk management: the need for existing risk management frameworks to be enhanced to identify, measure, manage and mitigate climate risks.
- Scenario analysis and stress testing: how these are key to assessing the impact of climate outcomes on each RFSPs business.
- Strategy and business model risk: looking at the impact of climate risks and opportunities on the RFSP’s risk profile, business strategy and sustainability.
- Disclosures: the importance of transparent disclosures to consumers and investors, and the importance of avoiding greenwashing.
The CBI is cognisant of the work involved at all levels in meeting the challenges posed by climate and ESG issues, and acknowledges that its own supervisory approach will continue to evolve. It is setting up a Climate Risk and Sustainable Finance Forum to enable RFSPs to share best practices on how they are embedding climate risk and sustainability considerations in their businesses.
The NGFS Glasgow Declaration, published today at COP26 by the Network for Greening the Financial System (NGFS) was signed by the CBI as one of the 100 NGFS members. The declaration highlights how NGFS members will continue to work together to encourage the financial investment that is needed to support the transition to a sustainable economy. The declaration follows the pre-COP26 NGFS publications (a Progress report on global supervisory and central bank climate scenario exercises and a Progress report on the Guide for Supervisors) and will soon be followed by a report on raising awareness of climate-related litigation.
We will be publishing a more detailed briefing in the coming days, looking at the finance-related developments from COP26, and the increasing supervisory focus from the CBI, the ECB and other EU supervisory authorities on how RFSPs address climate and ESG issues.
“Central banks have an important role in mitigating the effects of climate change. Climate change is already having profound effects on the world’s societies and economies but we can alter its future path if we start taking action now as we transition to a carbon neutral society.”