Central Bank of Ireland Outlook
Combatting greenwashing (i.e. when products or services are not as sustainable as claimed) is a key focus of the Central Bank of Ireland’s (CBI) supervisory approach to sustainable finance and addressing climate change. This was clearly stated in Governor Makhlouf’s November 2021 Dear CEO letter to all regulated firms, including (re)insures, outlining the CBI’s supervisory expectations regarding climate and ESG (environmental, social and governance) risks. The risk of greenwashing also featured as a key cross sectoral risk in the CBI’s recently published Consumer Protection Outlook Report 2022 which warned firms of the need for ‘special care…in the emerging field of sustainable finance’ and that firms ‘must explain properly the environmental impacts of products they are selling’ to avoid the risk of greenwashing. In addition, the CBI led climate Risk and Sustainable Finance Forum which took place on 29 June 2022, provided a platform for engagement and sharing of best practice on embedding climate risk and sustainable finance considerations within firms. Governor Makhlouf has also confirmed, in a recent speech, that the CBI will soon consult on draft guidance on climate change risks for insurance undertakings, the aim being to provide support and clarify expectations on how firms can address these risks in their business.
Insurance Industry – Regulatory Expectations
For the insurance sector, the CBI set out its expectations in relation to climate and ESG risk requirements in its November 2021 ‘Dear CEO’ letter as follows:
- Governance: Firms need to demonstrate clear ownership by their Boards of climate risks affecting the firm and to promote a culture that places emphasis on climate and other ESG issues;
- Risk Management Framework: Firms need to understand the impact of climate change on the risk profile of the firm and to enhance existing frameworks to ensure robust climate risk identification, measurement, monitoring and mitigation;
- Scenario Analysis: Scenario analysis and stress testing are critical to assess the impact of potential future climate outcomes, including impacts on capital adequacy, where applicable;
- Strategy and business model risk: Firms are expected to undertake business model analysis to determine the impacts of climate risks (and opportunities) on the firm’s overall risk profile, business strategy and sustainability, and to inform strategic planning; and
- Disclosures: Existing legal requirements on disclosure emphasise the importance of transparent disclosure to consumers and investors to protect their interests and wider market integrity. In particular firms, need to ensure they do not engage in the practice of greenwashing.
In addition, combatting greenwashing is one of the European Insurance and Occupational Pensions Authority’s (EIOPA) key sustainable activities for the period 2022-2024. In its work programme for the period, EIOPA notes “The sustainable finance ecosystem relies on transparent communication on the sustainability or taxonomy compliance of financial products and activities. EIOPA will engage in providing further guidance on sustainability-related disclosures and reporting. While the industry is facing the challenge of integrating sustainability preferences in insurance and pension products, supervisors will be facing the challenge of fighting greenwashing”. As outlined in its 2022-2024 work programme, EIOPA has committed, along with the other ESAs, to advising the European Commission on measures to address greenwashing.
The EIOPA has also set out the requirement for insurers to appropriately consider and incorporate climate change related risks within their own solvency risk assessment (ORSA) process. EIOPA has noted the potential impact of climate change and related physical and transition risks for (re)insurance businesses and therefore has considered it essential that (re)insurers adopt a forward-looking approach to ensure the long-term solvency and viability of the industry. The expectation is that (re)insurers evolve the sophistication of the scenario analysis process, taking the size, nature and complexity of their climate change risk exposure into consideration.
Recent Enforcement Action
On 23 May 2022 the US Securities and Exchange Commission (SEC) charged BNY Mellon Investment Adviser, Inc. (BNY) for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds which it managed. The matter was settled for a sum of US$1.5m and represented the first settlement of an enforcement action taken by the SEC ESG taskforce. The SEC found that it had been represented or implied in various statements that all investments in the relevant funds had undergone an ESG quality review, even though that was not always the case. It was also held that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.
Investment Funds Industry
Similar to the insurance industry, many in the investment funds industry are in scope of the range of EU sustainable finance legislative measures mandating various forms of sustainability-related disclosures. On 31 May 2022, the European Securities and Markets Authority (ESMA) published a supervisory briefing with guidance for NCAs on combatting greenwashing. Although directed at NCAs, the guidance provides useful insight for regulated firms’ benchmarking of compliance with their sustainability-related disclosure obligations. Our briefing on the ESMA guidance is accessible here and further details of our ESG & Sustainability Practice Group is available here.
If you have any queries on the issues discussed in this article, please contact the Insurance team or your usual William Fry contact.
Contributed by Joan McCarthy and Frank Hanly