No time to wait: Addressing Climate Risk in the Financial System today -
Remarks by Sharon Donnery, Deputy Governor, Central Bank of Ireland
and Member of the Supervisory Board of the ECB, at Climate Finance
Week 2022
18 October 2022 Speech
Introduction
Good morning everyone - it's great to be here with you at Climate Finance Week. I'd like to thank the organisers for
inviting me to speak here today and congratulate them on successfully organising this week-long event for the 5th year
running.1
Last week I attended the IMF-World Bank Annual Meetings in Washington. The meetings provide an opportunity for
global leaders, policy makers, the private sector and civil society to discuss issues of global concern. It won't surprise you
that climate change was high on the agenda. But the thing that resonated most with me over the course of the week was
the sense of urgency conveyed by all who discussed the topic, the feeling that time is running out, that our window of
opportunity is closing. Indeed the IMF appealed to policymakers across the globe to urgently enact transformational
reforms to address climate change.2
The central theme of Climate Finance Week, "Investing in a Climate Resilient Future NOW", speaks to this urgency and
the need for actions today to tackle the challenges and avail of opportunities presented by climate change. A big part of
building a resilient future, of course, involves understanding and managing the risks that climate change poses today.
This brings me to the topic of this session and to my remarks, in which I will address the issue of climate risks in the
nancial sector. I will also speak to the ongoing work by the Central Bank of Ireland and others on this topic.
The science and scale of change required
But let me rst take a moment to reect on the recent insights from climate science, which need to be to the forefront of
our minds when we consider the risks of insufcient action on climate change.
This year the World Meteorological Organisation presented us with many stark facts - greenhouse gas concentrations,
sea level rise, ocean heat and acidication all reached new record highs last year. The most recent seven years,
2015-2021, were the seven warmest years on record. Hurricanes, ooding, droughts are becoming ever more
commonplace in our news, along with their devastating human impact.
Worryingly, the "physical risks" from climate change are certain to increase in coming years, but the rate at which this
will happen depends on our actions today. According to the Intergovernmental Panel on Climate Change, direct climate-
related damages in the second half of this century could range from severe in a 'business-as-usual' emissions scenario, to
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stable and decreasing if global 2050 net zero targets are reached. The "transition risks" associated with achieving such
targets - that is, the effects of government decarbonisation policies and actions by households and businesses - will be
disproportionally felt by emission-intensive businesses, households and countries, and those with fewer
decarbonisation options (heavy industry and aviation, for example). The manifestation of these risks will have broad
impacts, affecting macroeconomic and nancial outcomes, altering the underlying structure of economies and exposing
nancial rms and the overall nancial system to prudential risks such as credit, operational, market and liquidity risks.
The scale of adjustment required to 'green' our economies and minimise climate risks is substantial. But one thing is
clear, the least costly path is one in which there is immediate, deep and coordinated international climate action now.
The challenges faced require inter-governmental cooperation and national governments have a critical role to play in
the climate policy choices they make, which will involve trade-offs and have distributional effects. Adjusting to green
our economies and minimise climate risks requires large investments in renewable electricity and storage - on average,
approximately $1.7 trillion (globally) will be required annually to reach 70 per cent renewable supply by 2050 (Network
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for Greening the Financial System). And this is where the nancial system needs to play a pivotal role - in channelling
savings to investments that facilitate this green transition. But doing this requires a nancial system that is sound - that
is itself resilient to the risks posed by climate change.
Addressing the climate crisis
It is encouraging that there is a broad international effort underway to advance the toolkit to measure and disclose
climate related risks in the nancial sector and to advance supervision and regulation activities. These include, for
example:
The publication in 2017 of the recommendations of the Financial Stability Board's Task Force on Climate-related
Financial Disclosures (TCFD), which have been to forefront in establishing a baseline for managing climate related
risks.5
The establishment of the EU Taxonomy and Key Performance Indicators which provide clear criteria to measure
exposure to climate related impacts, and reporting of these will be mandated across the nancial sector.6
The Basel Committee on Banking Supervision has recently published principles for the effective management and
supervision of climate-related nancial risks.7
Despite this progress, however, there is no doubt that gaps remain, including a lack of data to adequately measure
climate-related risks and a lack of common standards to dene risks and disclosures. In this respect, the creation of the
International Sustainability Standards Board (ISSB) is a welcome development that will see a global baseline of
sustainability-related disclosure standards emerge. Similarly, we support the work of the NGFS in developing climate
risk scenarios to provide a common starting point for analysing climate risks to the economy and nancial system.
Further effort is needed, however, to promote convergence at a larger scale and continued engagement on challenges to
climate-risk management.
Prioritising climate risk at the Central Bank
So this brings me to the next part of my speech - I want to talk about the approach we are taking at the Central Bank to
addressing the risks posed by climate change.
Firstly, addressing climate change and the risks that it poses to price and nancial stability is aligned with the role of
central banks and with the mandate of the Central Bank of Ireland: to serve the public interest, by safeguarding
monetary and nancial stability and ensuring that the nancial system operates in the best interests of consumers and
the wider economy. It is also a strategic priority for us and we have embedded our commitment to address climate
change into our multi-year Strategy that was published late last year. We are committed to ensuring that climate change
considerations are incorporated into our 'business as usual', that the nancial system is resilient to climate-related risks
and capable of supporting the transition to a climate neutral future.
From a practical perspective, we established a Climate Change Unit last year to strategically drive forward this work and
to centrally oversee the integration of climate and broader sustainability considerations into our work. As part of this,
we are working to measure the exposures of the Irish nancial system to climate related risks, and to ensure that climate
risk management is embedded in the rms that we regulate, and to upskill and enhance capacity building on issues
related to climate risk.
While we need to develop internally, we must also focus externally, and seek to leverage on what already has been
acquired and developed. One of the ways we have sought to make progress in this area is through a shared dialogue and
learning with industry. To this end, earlier this year, we established a Climate Risk and Sustainable Finance Forum - the
Climate Forum as it is better known - which provides a shared space where the nancial industry and other key
stakeholders can discuss the implications of climate change for the Irish nancial system, learn from each other and
share best practices on embedding climate risk and sustainable nance considerations within their own rms. The rst
meeting took place in late-June, and in keeping with the need to build a shared capacity and leverage from existing
progress, working groups to develop guidance for industry are currently being established. Our next meeting takes
place in December, and through this Forum we hope to make meaningful progress on high-priority climate related issues
and challenges that we all face.
Of course prioritising climate action means that we must also redouble our efforts on an international stage - to both
contribute to and learn from our counterparts in other countries, and to coordinate actions in a meaningful way. In this
respect we are part of the Network for Greening the Financial System, a group of central banks and supervisors that
exchange experiences and share best practices to contribute to the development of climate risk management in the
nancial sector.
We are also active in a number of supervisory fora that are considering the impact of climate change on different parts
of the nancial sector, whether that is banks, insurance companies or investment funds, and we participate in the design
of regulatory rules and supervisory frameworks at European and global levels that address climate risks. For example, as
a member of the ECB's Supervisory Board overseeing the prudential supervision of banks in the euro area, I see rst-
hand the importance of tackling climate-related and environmental risks, as reected in it being one of the ECB's key
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supervisory priorities for 2022-24. We have set a strategic objective for banks to proactively incorporate climate-
related and environmental risks into their business strategies and their governance and risk management frameworks.
In 2020, the ECB published a guide on climate-related and environmental risks, outlining our supervisory expectations
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regarding banks' risk management and disclosure in this area. In the past two-years, we have also been carrying out
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supervisory exercises that have provided information on banks' preparedness around climate risk.
Finally, addressing climate-related risks means that the Central Bank must also consider how our own business
operations will be affected by climate change. In 2018 we committed to reducing our Scope 1 and 2 greenhouse gas
emission intensity by 50 per cent by 2030, with the aim of becoming a net zero carbon emissions organisation by 2050.
More recently, we published a Sustainable Investment Charter which will guide the integration of sustainable
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investment principles to the management of our investment assets. We are also currently working with colleagues
across the Eurosystem towards harmonised disclosures on climate related risks to our investment assets. The rst such
disclosure will take place in Q1 2023, and will include the measurement of greenhouse gas emissions across a number of
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different metrics.
How rms should identify and manage climate risks
I want to turn now to the actions required by regulated rms to identify and manage their climate risks. I mentioned
earlier some of the work that is underway at EU and international level on this issue. While most of the progress at
international level has or will nd its way into the regulatory rulebook at EU level, we cannot wait for all debates to be
resolved, for all gaps to be lled and for all solutions to be available. We must take action now to understand and manage
our own positions with respect to climate change.
In that vein, last November, we wrote to all regulated nancial service providers setting out our broad expectations on
climate matters, including climate risk management. In essence the message was simple - all regulated institutions must
consider how climate change impacts upon business models and operations and put in place the necessary internal
arrangements to address climate risk from the perspective of governance, staff awareness and training.
We recently published a consultation paper on guidance on climate risk management for the insurance sector that
elaborates on this. In this paper, we set out how we expect insurers to set up their governance structures, business
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strategy and risk management processes to manage climate change risks.
The issues raised in our consultation can also apply in other sectors - essentially around the need to promote strong
governance with respect to climate change risk, and to ensure that the 'tone from the top' promotes a culture of
responsibility and meaningful action. Furthermore, all rms should understand the materiality of their exposure to
climate change risk, taking a broad view of the potential impacts on the sustainability of their business strategy over the
short, medium and long term. Equally important is that all rms follow through on their commitments with real and
measurable actions and accountability. Through our supervisory activities we will continue to assess progress across all
rms and sectors on these issues.
Conclusions
To conclude, the window for meaningful action on climate change is closing. Urgent progress is needed at national and
international levels, and we will need to be collaborative and innovative in meeting the challenge ahead. At the IMF-
World Bank Annual Meetings last week, the warnings were stark. The annual investment required to meet the Paris
Agreement is 5-10 times below what it needs to be. Added to that is the time dimension, where action needs to be taken
immediately. As the IMF Managing Director, Kristalina Georgieva put it, "if we do not shift our trajectory this decade.
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We are cooked. And if you don't want to be cooked, then we should speed up".
At the Central Bank we recognise the urgency and have committed to play our part in addressing climate change as set
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out in our pledge on climate change action and our endorsement of the NGFS "Glasgow Declaration" last year. We
continue to focus on addressing climate change as a strategic priority - the nancial system has to be resilient to the
risks and it has a critical role to serve the needs of consumers and the wider economy in transitioning to a carbon neutral
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future. As we have previously articulated, this role involves moving away from nancing governments, rms and
projects that are environmentally damaging and moving into nancing actions that support the transition to a more
sustainable economic model. This involves rms acting now to understand and address the challenges associated with
climate change. In order to mitigate the risk and adequately position themselves to respond to these challenges,
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opportunities and regulatory expectations, rms will need to understand the impact of climate related risks on their
business environment, their business models and investments.
While this is a challenging time for us all on many fronts - we must recognise the urgency of climate change and work
together to, as the theme of this week suggests, invest in a climate resilient future now.
Thank you.
1
With thanks to Yvonne McCarthy and Philip Brennan for their assistance in preparing these remarks.
2
IMF-World Bank Annual Meetings Press Centre
3 th
IPCC 6 Assessment Report
4
NGFS report
5
Recommendations of the Task Force on Climate-Related Disclosures , 2017
6
C ouncil Regulation (EU) 2020/852 and Commission Delegated Regulation (EU) 2021/2178
7
Basel Committee on Banking Supervision Principles for the effective management and supervision of climate-related
nancial risks
8
See ECB Banking Supervision - Supervisory priorities for 2022-2024
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See ECB Banking Supervision (2020), "Guide on climate-related and environmental risks: Supervisory expectations
relating to risk management and disclosure", November
10
In 2021 the ECB asked banks to conduct a self-assessment in light of the supervisory expectations outlined in the
2020 guide. In 2022 the ECB conducted a climate risk stress test to more fully understand how exposed euro area
banks are to climate and environmental risks
Sustainable Investment Charter - Central Bank of Ireland
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Using the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as the initial
framework and reporting, as a minimum, in the category of metrics and targets
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In a relatively recent climate and emerging risks survey we found that only 20 per cent of insurers had integrated
climate risk into their risk management frameworks, with fewer than half conducting some form of scenario analysis or
stress testing
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Getting to Net Zero - IMF Media Center
15
Central Bank of Ireland pledge on climate change action, 3 November 2021
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"Disruption in nancial services: Navigating the winds of change" - Deputy Governor Ed Sibley to the ACOI, 18
November 2021
17
Supervisory expectations of regulated rms regarding climate change and other ESG issues - Dear CEO letter, 3
November 2021
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