The impact of recent regulatory developments in Ireland on ESG and governance

The Central Bank of Ireland (the Central Bank) has identified ESG as one of its supervisory priorities. This includes exposure to climate-related and environmental risks as well as the prevention of ‘greenwashing’. The importance of good governance for ESG related matters is underpinned by a number of recent and upcoming important regulatory developments in Ireland, imposing new obligations on both firms and senior executives.

Individual Accountability Framework (IAF) and the Senior Executive Accountability Regime (SEAR)

Firstly, and generally, for at least credit institutions, insurers and some major investment firms, the introduction of the Central Bank (Individual Accountability Framework) Act 2023 (the IAF Act) will require senior executives in pre-approved controlled functions (PCFs) to comply with a new ‘Duty of Responsibility under the Senior Executive Accountability Regime (SEAR). The purpose of SEAR is “to improve governance, performance and accountability in firms by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies for their business…”[1]

SEAR requires regulated firms to prepare Statements of Responsibilities for each PCF role holder setting out the area of the business for which they are responsible. The new Duty of Responsibility for PCFs requires them to take any steps that are reasonable in the circumstances to avoid a regulatory contravention occurring in their responsible business areas. The Central Bank will be entitled to take enforcement action against these individuals if the firm commits a breach and they are shown not to have taken such ‘reasonable steps’.

As part of SEAR, the Central Bank has set out a list of ‘inherent’ (inherent in a particular PCF role) and ‘prescribed’ responsibilities (responsibilities which must be allocated to a PCF in the firm) (PRs). Several of these directly align with the Central Bank’s expectations on the governance of ESG related matters (as set out in further detail below).

Consumer Protection Code 2012 review

Secondly, the Central Bank is also currently undertaking a review of the Consumer Protection Code (the Code) (see briefing here). Climate related issues are one of the discussion themes to be considered during the review process. It focuses on the need for consumers to have confidence that regulated firms are resilient to climate risks and that they will avoid ‘greenwashing’ in relation to formal disclosures or informal statements.

The Central Bank plans to update the Code and publish a new set of regulations in 2024 (and again in 2025). This will be an important development, which will impose further ESG regulatory obligations on regulated firms and senior executives from a consumer protection perspective.

The Central Bank’s ESG expectations

Three key themes are evident in the Central Bank’s articulation of its expectations:

1. Governance and culture

The Central Bank has set out its agenda and expectations broadly regarding ESG compliance. In a speech delivered by the Central Bank in June 2023[2], the message was that more needs to be done across the financial services industry because “…boards do not have clear, credible and achievable plans in place…to meet the supervisory expectations in respect of climate related and environmental risks. The common theme from both these European and domestic findings, is that while there has certainly been progress, clearly more needs to be done including in relation to governance considerations.”

This emphasises the Central Bank’s earlier messages in its supervisory expectations relating to ESG issues. It previously noted that for those overseeing regulated firms, “…there is a need to lead and drive the climate agenda and broader ESG agenda….”. The Central Bank expects firms 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.”[3]

The Central Bank requires these matters to be embedded into the day-to-day operations and culture of firms; it expects the tone to be set from the top. There is clearly an overlap between the Central Bank's ESG specific expectations and the overall culture of regulated firms more generally. This, in turn, broadens the scope of ESG matters to those who are ultimately responsible for culture within firms. For example, under the IAF, PRs require certain PCFs to take responsibility for the adoption and development of a firm’s culture more generally, including:

• PR4 – ‘Responsibility for leading the development of the firm’s culture, including conduct, by the Board as a whole, including the implementation of effective conflicts of interest policies and procedures in relation to consumer protection risk’.
• PR5 – ‘Responsibility for adopting the firm’s culture in the day-to-day operation of the Firm’.

It will be for the PCFs who are assigned these PRs to take reasonable steps to ensure that the firm’s culture meets the Central Bank’s expectations, including as regards any specific aspects of culture, such as the embedding of ESG principles in a firm’s governance and culture overall. 

2. Climate and environmental risk

More specifically, the Central Bank has also indicated that exposure to climate-related and environmental risks is a supervisory priority. It expects firms to understand and to account for these risks in their risk management frameworks and their business model risk. Again, these expectations are reflected in a number of requirements under SEAR. In particular:

• The inherent responsibility of the Chief Risk Officer (PCF 14) is to have overall responsibility for managing the firm’s risk function, including risk controls, setting and managing risk exposures and reporting directly to the board on risk management matters.
• PR 28 is the responsibility for managing the firm’s approach to identifying, assessing and managing climate-related and environmental risks across the firm.

In our view, the above prescribed responsibility squarely aligns with the Central Bank’s expectations around climate and environmental risks and reflects its view of the significance of this issue. The PCF assigned this responsibility within firms will likely need to engage with the Chief Risk Officer (if PR 28 is not also assigned to this individual) to take reasonable steps to ensure that these risks feed into the firm’s overall risk management processes.

3. Consumer protection

At an even more granular level, again linked to the Central Bank’s cultural agenda for all regulated firms, the Central Bank is also focused on consumer protection from an ESG perspective. Firms will be required to ensure that disclosures are transparent and that ‘greenwashing’ is avoided. As noted above, this is a focus in the ongoing Code review and we can expect to see new requirements reflected in the updated Code, which will need to be implemented in certain of a firm’s policies and procedures.

An example of an even more specific focus for the Central Bank is the asset management sector where it aims to ensure that where investments are described as ‘green’ or ‘sustainable’, that position is accurate. The implementation of the Sustainable Finance Disclosures Regulation (SFDR) and the Taxonomy Regulation at an EU level underpin this aspect of ESG compliance as they seek to ensure transparency around ESG related investments.[4]

Again, applying the individual accountability lens, consumer protection is also a key theme in SEAR. This is reflected in the following PRs:

• PR7 – ‘Responsibility for ensuring that action is taken to prevent further harm or detriment to customers where the firm becomes aware that a decision or action taken or failure to act has caused harm or detriment to customers’.
• PR8 – ‘Responsibility to adequately consider the impact of key business initiatives and strategic decisions and to ensure that any necessary changes are made to such initiatives/decisions prior to their implementation to avoid any harm to customers’.

These are relatively broad responsibilities. In the context of ESG compliance, they could arguably extend, for example, in the asset management and insurance contexts, to ensuring that appropriate processes are in place to ensure that disclosures to customers regarding ESG matters are accurate and that any concerns are identified quickly to avoid customer detriment.

Commentary

These regulatory developments are key in demonstrating the Central Bank’s view of the significance of ESG-related matters by placing a number of obligations squarely within the scope of senior executive’s core responsibilities.

From a SEAR perspective, it will be important that firms take immediate steps to decide which PCFs have responsibility for these matters and to ensure that these individuals have a sufficient understanding of what is required to comply with these responsibilities in order to avoid potential regulatory action being taken against the firm or individual in the future.

Our Regulatory Investigation teams have deep experience in advising regulated firms on the IAF Act (see our thinking here) and the Consumer Protection Code, as well as the Central Bank’s expectations arising from, for example, their supervisory frameworks in the retail banking, asset management and insurance spheres.

For more information, please contact Dario Dagostino, Partner, or Laura Corrigan, Senior Associate, or your usual ALG contact.