Irish financial firms urged to support sustainable finance

Directors at the Central Bank of Ireland (CBI) delivered a number of speeches on sustainable finance and climate resilience as part of a programme of events marking the Irish government-backed Climate Finance Week this week. In their speeches, the directors explored the role to be played by financial firms in the shift to a sustainable economy, as well as the potential risks that climate change posed to the financial services sector.

In his speech, Vasileios Madouros, the CBI's director for financial stability, said that climate change "falls squarely within the Central Bank's mandate - to serve the public interest, by safeguarding monetary and financial stability and ensuring that the financial system operates in the best interests of consumers".

"We will increasingly be embedding climate risk issues into our financial stability assessments and supervision," he said.

"Central banks will not drive the transition to a low-carbon economy. This is the role of elected governments. But we recognise that understanding the impact of climate change and the transition to a low carbon economy is crucial to delivering our mandate," he said.

Madouros explained that climate change poses both physical risks, including extreme weather events and longer-term environmental changes; and transition risks, or the impact of the adjustment towards a low-carbon economy. Among financial firms, insurers are most exposed to physical risks, as they cover the losses borne by households and businesses when physical risks crystalise.

Financial firms have a significant role to play in facilitating the investment needed for the transition to a low-carbon economy, Madouros said. The global Intergovernmental Panel on Climate Change (IPCC) has estimated that annual energy-related investment of around $830 billion will be needed until 2050 in order to limit global warming to the 1.5 degree global warming limit target set by the 2018 Paris Agreement on Climate Change, he said.

Banking law expert Ann Lalor of Pinsent Masons, the law firm behind Out-Law, said that Madouros' speech "reflects the awareness of central bankers and regulators of the very real impact climate change will have on the financial services sector in terms of physical and transitional risks".

"Lenders in the market are set to play a fundamental role in facilitating by funding the transition of assets and industries to reduced and eventually zero carbon emissions. Action and participation by lenders will serve to protect those lenders' exposures to loan portfolios secured by stranded and therefore devalued assets. Lenders have an opportunity to be part of getting their borrower communities to 'green' and also to protect their own secured positions," she said.

In a separate speech, Gerry Cross, the CBI's director of financial regulation for policy and risk, covered some of the regulatory issues, with a particular focus on investment funds. These include EU-level proposals to create a taxonomy, or classification system, of environmentally sustainable economic activity for investment purposes; and to create two new categories of voluntary benchmarks for low carbon investments, and investments aligned with the 1.5 degree Paris target.

For funds, however, the most significant development is the Sustainability Disclosure Regulation, which will introduce new obligations on what financial market participants must disclose about how they integrate environmental, social and governance (ESG) factors into their activities. The new requirements will apply to UCITS management companies and alternative investment fund managers (AIFMs), as well as insurance companies that provide investment products and pension product manufacturers and providers.

Investment funds expert Aongus McCarthy of Pinsent Masons said: "Ireland has sought to put itself at the forefront of the integration of sustainable finance and ESG practices".

"It is clear that, at a national and European level, investment funds, management companies and investment firms, amongst others, will be expected to contribute to the achievement of a sustainable economy, through responsible, sustainable and impact investment and that such considerations should be borne in mind when key strategic decisions are being taken," he said.