On 3 November 2021, the Central Bank of Ireland (CBI) published its anticipated "Dear CEO" letter on climate and ESG issues.
The letter describes the CBI's expectations for regulated financial service providers (Firms) in relation to climate and broader ESG issues.
Importantly, the expectations will apply in a proportionate manner - aligned with the nature, scale and complexity of the Firm.
Among other matters, the CBI acknowledges the significant challenges Firms can face in addressing climate and ESG issues. Notably, it states that its own supervisory approach will evolve over time (in line with its own regulatory experiences, engagement with stakeholders and international developments).
The CBI's expectations of Firms focus on five key areas:
Governance: Firms' boards will need to demonstrate clear ownership of climate risks, while also promoting an internal culture that emphasises the importance of climate and other ESG issues.
Risk management framework: Firms will need to understand the impact of climate change on their risk profiles and ensure that existing risk management frameworks are appropriately robust to identify, monitor, measure and mitigate climate risks.
Scenario analysis: Appropriate scenario analysis and stress testing will be critical to assess the impact of future climate outcomes for Firms.
Strategy and business model risk: Appropriate business model analysis should be undertaken to determine the impacts (and potential opportunities) of climate risks on Firms' overall risk profile, business strategy and sustainability.
Disclosures: Transparent disclosures to consumers and investors will be key with the CBI reiterating the importance of not engaging in greenwashing.
The CBI also highlights the establishment of its Climate Risk and Sustainable Finance Forum. The purpose of that forum is to enable the sharing of knowledge and best practice approaches and to understand the implications of climate change for the Irish financial system.
Unsurprisingly, this letter demonstrates that climate change and ESG will continue to be a core focus on the CBI's agenda. This is further emphasised by the CBI's endorsement of the "Glasgow Declaration" issued this week by the Network for Greening the Financial System. Additionally, the CBI highlights its commitment to cooperate internationally with other supervisory and regulatory authorities in addressing the challenges posed by climate change.
For more information, please contact your regular A&L Goodbody contact.
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