Central Bank of Ireland sets out supervisory expectations of regulated firms regarding climate change

As corporates, investors and the general public watch closely for positive developments at the 26th UN Climate Change Conference of the Parties (COP26), the Central Bank of Ireland (Central Bank) took the opportunity on the 3^rd November, 2021 to issue a letter to Chairs and CEOs of Regulated Financial Services Providers (RFSPs)[1] (the Letter) in Ireland to highlight the statutory obligations and supervisory expectations relating to climate and broader environmental, sustainability and governance (ESG) issues.

Supervisory Approach and Climate Risk and Sustainable Finance Forum

The Letter demonstrates the Central Bank’s commitment towards climate change and ESG related matters as part of its supervisory agenda, taking into account the EU regulatory framework on sustainability and developments and initiatives by peer regulatory authorities.

The Central Bank also announced the forthcoming establishment of a Climate Risk and Sustainable Finance Forum (expected in the first half of 2022) with the objective of building a shared knowledge and understanding of the implications of climate change for the Irish financial system.

Supervisory Expectations

In its Letter, the Central Bank set out a number of expectations for RFSPs to consider, focusing on five key areas:

1. Governance: Boards of Directors of RFSP will need to demonstrate clear ownership of climate risks and to ensure an internal culture is promoted, which emphasises the importance of climate and other ESG issues.
2. Risk management framework: RFSPs will need to understand the impact of climate change on the risk profile of their firms and review and enhance their existing risk management frameworks to ensure that they are sufficiently robust to identify, monitor, measure and mitigate climate risks.
3. Scenario analysis: RFSPs should ensure that they have appropriate scenario analysis and stress testing in place to assess the impact of potential future climate outcomes, including changes to capital adequacy requirements, on the firm.
4. Strategy and business model risk: RFSPs should conduct business model analysis to determine the impacts of climate risks (and opportunities) on its overall risk profile, business strategy and sustainability, and to inform strategic planning.
5. Disclosures: The Central Bank noted that that transparent disclosures to consumers and investors are important to protect their interests and wider market integrity. RFSPs need to ensure that they are not engaged in the practice of ‘greenwashing’.

Given the momentum around climate change, the Letter is helpful at keeping climate change and ESG related risks at the forefront of the minds of boards, senior management and staff of RFSPs. The Central Bank supervisory expectations for RFSPs are non-binding and non-prescriptive and it is therefore for impacted RFSPs to assess and apply the expectations as they deem appropriate in a proportionate manner - aligned with the nature, scale and complexity of the relevant firm.

How can DLA Piper assist?

With regards to climate and ESG related risks, this is a key commitment of DLA Piper. We understand the unique challenges and needs of the financial services sector and can deliver tailored solutions that help our clients around the world. For more information, please contact the authors or your regular DLA Piper contact.

^{[1] The Letter applies to all RFSP as defined under section 2 of the Central Bank Act, 1942.}