“Sustainable Finance: the changing regulatory landscape” - Gerry Cross, Director of Financial Regulation: Policy & Risk

03 November 2020 Speech

Gerry Cross

Speech delivered at Sustainable Finance Ireland's third annual ESG Day


Good afternoon. Firstly, my thanks to Sustainable Nation Ireland for inviting me to speak at Climate Finance Week 2020. I am sorry that we are unable to be physically together for the week’s events. Hopefully, amongst the many very negative effects of this pandemic some positive outcomes will also emerge. These might include enhanced momentum in addressing climate risks, as well as the application of practical sustainability-related lessons learned from the crisis. For example one of the things we have learned is how much work can be effectively done without the same level of need for carbon emitting physical travel.

When I spoke at Climate Week last year, I noted that in addressing climate risk issues financial regulators including the Central Bank of Ireland were addressing a number of interacting and complementary priorities:

Firstly: addressing the risks to regulated firms’ sound functioning, and more broadly, to financial stability, arising from increasingly commonly occurring climate events or from the transition to a sustainable economy. These are the prudential and financial stability risks associated with climate change.

Secondly: addressing conduct aspects. That is ensuring that investors are fully and effectively informed. And where investments or financial products are described as green or sustainable, ensuring that this is meaningful and accurate and based on reliable parameters that are consistently applied both within jurisdictions and across Europe.

And thirdly, I noted that in our role as financial regulator, the Central Bank of Ireland seeks to ensure that the financial system operates in the best interests of consumers and the wider economy. I noted that the political and legislative authorities have been determining that our economy should become ever more sustainable and that the financial sector should play its role in achieving this. So in this way also the implementation of financial regulation is adapting to reflect climate issues - in particular as regards the delivery of sustainable finance.

Again as I noted last year, we approach these developments in a manner that is always fully consistent with our statutory mandates of safeguarding monetary and financial stability, securing the proper and effective regulation of financial service providers and markets, and ensuring that the best interests of consumers of financial services are protected.

In the past year, the EU sustainable finance agenda has continued apace. The European Commission has published its Green Deal and launched a number of consultation papers1 in the area of sustainable finance. In our response to the European Commission’s Renewed Sustainable Finance Strategy in July, the Central Bank noted that without diminishing the importance of continued necessary progress on the legislative and regulatory front, a central focus for the coming period should be the effective implementation of the legislative changes that have been introduced.

We are now facing the implementation of the first tranche of the Sustainable Finance Action Plan items from 2018. I want to focus today on some of the more immediate challenges in the year ahead as we face these first implementation hurdles.

Before I do so, let me also mention that to help us meet this growing priority, which nearly all aspects of our mandates at the Central Bank, we are in the process of establishing a centralised Climate Change unit. This unit, which will shortly be operational, will operate as a motor of our strategy in this area and as a strong central component in a hub and spoke model involving for example our different sectoral policy and supervisory areas. The establishment of this new dedicated unit, further reflects the importance the Bank is placing on its role in relation to climate risk and the financing of a sustainable economy more generally.

Markets and Asset Management

Looking firstly at the markets and asset management sector: we will over the next few months, see the implementation of some key legislative changes. Notably, implementation of the Disclosures Regulation (SFDR) begins on 10 March 2021; amendments to UCITS/ AIFMD and MiFID II are expected to apply from Q4 20212 and taxonomy-related disclosure requirements will commence for financial market participants from 1 January 2022. These obligations are cross sectoral and will apply to fund managers, insurance companies that provide investment based insurance products; investment firms that provide portfolio management; and pension product manufacturers / providers as well as investment and insurance advisors.

The timelines for these upcoming legislative obligations are ambitious by design and the SFDR is the most ambitious. At their core, these requirements are intended to provide increased transparency around ESG characteristics and the integration of sustainability risks at a product and entity level via disclosure through various channels including pre-contractual documentation, website disclosures, and so on. The Joint Committee of the European Supervisory Authorities (ESAs) have been mandated to develop a Regulatory Technical Standard (RTS) which will become the level 2 regulation for these obligations.

You may be aware that the European Commission has decided to postpone the implementation of the RTS beyond the 10 March date. This delay applies to the RTS but not to obligations in the Regulation itself. So there will be a time lag between the application of the so-called “Level 1” requirements, which will still come into effect in March, and the detailed requirements being set out in the RTS.

This means that from the 10 March, firms must comply, for example, with the disclosure principles of Article 8 (‘light green’ products) and Article 9 (‘dark green’ products). There are questions around product classification, specifically with respect to scope of application of Article 8 as distinct from Article 9 products and other “non-ESG” products that were to be addressed by the RTS. In the first instance, therefore, the decision regarding classification will rest with the relevant manager. The same applies with respect to the disclosures required under Article 6 and Article 7 of the SFDR – the responsibility rests with the relevant fund manager to ensure that their disclosure is appropriate to their particular funds.

As we approach the 10 March 2021 deadline, we are working through the reality that prospectuses - including all UCITS and AIFs prospectuses – and other precontractual documents, will need to be amended in line with the requirements of the SFDR. For our part, we are in the process of finalising our SFDR implementation approach and will be communicating with the industry once decisions have been finalised over the next few weeks. We are aware that some industry participants have progressed quite far in their implementations plans, whist others are not well advanced. We understand this is a time of unusual demands on firms and resources as a result of the pandemic, but those who are behind in their preparation will need to move forward at pace. Looking forward, I the overall quality of disclosure will no doubt improve over time.

Another implementation challenge rests in the relationship between core pieces of legislation. There are some synchronisation issues between parts of the sustainable finance legislative texts, both in terms of concepts and timing. These have been well documented by the industry as part of the regulatory consultations and also highlighted by the ESAs. The focus is primarily on the alignment between the SFDR, the Taxonomy Regulation and the Non Financial Reporting Directive. For example, the Taxonomy Regulation extends the product disclosure obligation for Article 9 (dark green) products to include detailed information on that environmental objective, and description as to how the investments underlying the financial product invest in activities captured by the Taxonomy.

Further cross-over exists in relation to concepts such as ‘do no significant harm’ and ‘sustainable investments’; and to the availability of enhanced and timely data from the non-financial sector. On this, the European Commission is currently considering the responses to the Non-Financial Reporting Directive consultation, that took place earlier this year. Again, we face a time lag issue: as legislation comes into effect and is enhanced by technical standards and guidance, clarity will be increased and quality improved. This does not however detract from the need for market participants to engage with the relevant obligations and satisfy themselves that they have taken the steps necessary to be in compliance with those requirements as they come into force.


Turning now to the banking sector. Banking will play a key role in financing the transition of the economy to a more sustainable form. While banks will be alive to the opportunities that a sustainable economy presents, they are also exposed to the significant climate and transition risks that could impact their safety and soundness and that of the financial system. One example of that are the “stranded assets” risks associated with exposures to carbon intensive industries. Physical and transition risks act as drivers of prudential risks, such as credit, operational, market and liquidity risk.

A feature of climate-related and environmental risks is that as well as short term effects there are also significant longer term aspects. Therefore, long term resilience to these risks should be reflected in banks’ business models and strategy.

For regulators, there are challenges to developing and implementing a robust regulatory framework that takes account of environmental risks. Challenges relating to data gaps; ensuring a consistent methodological approach; and mapping the transmission of environmental risks to the banking system are currently being addressed through several strands of work at EU level.

The Single Supervisory Mechanism (SSM) of which the Central Bank is a Member, expects institutions to consider climate-related and environmental risks – as drivers of established categories of prudential risks – when formulating and implementing their business strategy, governance, and risk management frameworks and disclosure practices. The European Central Bank's (ECB) draft Guide on Climate-Related and Environmental Risks, to which public consultation recently ended, puts forward detailed supervisory expectations in this regard. Once applicable, institutions will be expected to consider the prudence of their current practices against the expectations outlined in the Guide, and it will be used by the Joint Supervisory Teams in their supervisory dialogues with banks going forward.

We have also been addressing these challenges through our work at the European Banking Authority (EBA) as part of its Sustainable Finance Action Plan derived from mandates introduced as part of the revisions to Capital Requirements Regulation/Directive (CRR/CRD) published in 2019.

The EBA is considering how to integrate ESG risks into the Supervisory Review and Evaluation Process (SREP) for banks and investment firms. Significant work has been undertaken on how to integrate these and an EBA Discussion Paper will be published on this shortly. Through this work, as per the CRD mandate, the EBA will seek to identify a uniform definition of ESG risks and develop both qualitative and quantitative criteria for the assessment of these risks on the financial stability of institutions. This work will also consider how institutions should implement processes, mechanisms and strategies to identify, assess and manage ESG risks and finally, how these risks can be incorporated into the supervisory process.

Another set of challenges relates to enhancing disclosures in the banking sector. Under the revised CRR, large institutions with publicly listed issuances are required to disclose information on ESG risks, physical risks and transition risks. Again with the EBA, we are working to develop a technical standard to implement this requirement and EBA will specify ESG risks’ disclosures as part of the comprehensive technical standard on Pillar 3 disclosures.

Finally, the EBA has been asked to consider whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified. This work will be informed by our assessment of whether climate-related risks are being adequately identified, monitored, mitigated and reported by institutions, and considering whether such risks are reflected in existing prudential requirements. As we have made clear on a number of occasions, potential future changes to the prudential framework must be underpinned by an accurate assessment of risks in order to ensure the framework remains fully risk-based. A failure in this regard could undermine longer term stability and thus ultimately sustainability goals. At the same time it will be an important, if difficult, task to try to understand how the results of risk modelling may change in the context of an economy that is increasingly a sustainable one. Or to put it another way, to see whether the results of risk modelling and calibration carried out against the backdrop of a non-sustainable economy need to be considered differently in the context of a sustainable one?

Insurance Sector

In addition to the issues under the SFDR and related regulations described above for insurers providing investment products, the insurance industry is, of course, exposed to climate related risks through its risk insurance activities. The sector is well qualified to understand the nature and pricing of relevant risks and to play a critical role in the management of climate-related risks in its capacity as a risk manager, risk carrier and investor. Therefore, assessing, pricing and appropriately managing climate-related risks is a key priority for the insurance sector. It is important that these risks are included in the risk management and strategic planning of insurance firms. The Central Bank expects Irish insurers to give appropriate consideration to assessment of climate change and adopt a longer-term perspective compared to current practices with typical business planning and strategy setting processes.

Insurers’ Own Risk and Solvency Assessment (the ORSA) has been one of the focus areas for EIOPA in their ongoing work on climate risk and sustainable finance. As a follow up to their Opinion in 2019 on Sustainability within Solvency II, EIOPA recently launched a consultation on a draft supervisory opinion on the use of climate change risk scenarios in the ORSA. In this, EIOPA sets out its expectations, including the importance of insurers considering climate change related risks using a short term one-year time horizon; taking a forward-looking view of climate change-related risk beyond the one-year time horizon through the system of governance, risk management and ORSAs; and applying a risk-based and proportionate approach to material climate change risks for at least two long-term climate scenarios. My colleague Domhnall Cullinan Director of Insurance will speak further on the ORSA as decision making tool at the Central Bank’s Insurance Industry Briefing next Thursday 12 November.

The Central Bank has recently issued a Climate & Emerging Risk Survey to the insurance sector3. The objectives of the survey are threefold: firstly to capture the level of awareness of the risks amongst undertakings; secondly to identify the exposure to the risks; and finally to collate possible actions to manage/mitigate the risk. To achieve these objectives, we will analyse the responses submitted and provide feedback on our key observations. This exercise will highlight areas of potential vulnerability on which to focus future engagement with industry and provide relevant guidance. 

Final remarks

In conclusion, what I have said here broadly summarises how we at the Central Bank are approaching the implementation of the ESG regulatory framework. We know that many of you are dedicating significant resources to the ESG regulatory agenda and are keen to get this right, from a risk management and soundness perspective, to ensure that investors are fully informed and fairly treated, and of course to take the opportunities presented including contributing to the transition to a sustainable economy.

We, for our part, expect you to meet these objectives. Financial regulatory requirements and supervisory approaches are being adapted to this end. We will continue to engage openly with you, sharing relevant information, and making clear our expectations. We will of course continue our active engagement with our colleagues in the ESAs, other national supervisors and the European Commission, as this work continues to evolve. At an international level, we will continue our membership of the Sustainable Insurance Forum (SIF), IOSCO Sustainable Finance Network and the Network for Greening the Financial System (NGFS). The dialogue between supervisors, the sharing of experience and information exchanged in these networks, will be crucial in overcoming the challenges over the coming years.

Thank you.

My thanks to Philip Brennan, Elaine Brownlee, Anne-Marie Butler, Fionnuala Carolan, Brid Faulkner, David Hastings, Kleona Menti and James O’Sullivan for their contributions to this speech.

1 European Commission: Consultation on the renewed sustainable finance strategy (8 April 2020).

European Commission: Targeted consultation on the establishment of an EU Green Bond Standard (12 June 2020).

European Commission: Non-financial reporting by large companies (updated rules) (20 February 2020).

European Commission: Sustainable corporate governance (26 October 2020).

2 Draft amending delegated acts have been published; the outcome of Commission consultation is awaited (closed 6 July 2020) and delegated acts will apply on first day of the twelfth month after publication in the Official Journal.

3 Central Bank of Ireland: The Insurance Quarterly (September 2020).