Climate change a key focus for the Central Bank

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  • Central Bank to participate in US dollar-denominated green bond investment fund.
  • Behind the Data presents new green bond indicators, highlighting that, by sector, Irish-resident investment funds are the largest holders.
  • Survey of insurers finds that while the majority of firms have put management structures in place to oversee climate risks, over half don’t have a climate strategy, plan, or policy in place.

The Central Bank of Ireland today (13 May 2021) announced its participation in the US dollar-denominated green bond investment fund for central banks established by the Bank for International Settlements (BIS).

Investing in this green bond fund forms part of the Central Bank’s aim to further integrate climate change-related sustainable and responsible investment principles within its investment assets. The investment also aligns with the recent agreement on a common Eurosystem stance for climate change-related sustainable investments in non-monetary policy portfolios for Eurosystem central banks.

Further to this, the Central Bank has today also published two pieces of research that will help to inform its approach to climate-related risks.

The first of these is the latest entry in the Behind the Data (BtD) series, entitled “Green Bonds: A Snapshot of Global Issuance and Irish Securities Holdings”. This BtD bridges market data gaps by combining existing Central Bank data with commercial sources to examine the European green bond market and participation by Irish-resident entities. Although still relatively small, the green bond market has grown since 2018. Outstanding amounts of green bonds across the euro area increased from €72bn at end-2017 (0.4% of total euro-area debt securities) to €314bn at end-2020 (1.7% of total euro-area debt securities). Irish participation in this market, through issuance or holding, has grown in tandem. The BtD finds that Irish-resident investment funds hold the majority of green bonds in Ireland, with €12.6bn or 74% of total green bond holdings at end-2020. Credit institutions are the second largest holder, followed by insurance corporations. 

Secondly, the Central Bank today published the results of a survey of insurance firms’ exposures to and preparedness for emerging risks, including climate risks. The results provide a number of key insights into how insurers are managing climate risks. Respondents indicated that physical and transition risks are the most material risks arising from climate change, while 11% of firms indicated that reputational risks were a concern. The findings also show that a majority (84%) of firms have management structures in place for oversight of climate risks. However, they also indicate a need for firms to take further steps to fully assess the impact of these risks on their business model, as 54% of respondents indicated they did not have a climate strategy, plan, or policy in place.  The results from the survey will inform the supervisory approach going forward.

Commenting, Deputy Governor Central Banking, Sharon Donnery said, “Today’s announcement reflects the Central Bank’s commitment to consider the challenges posed by climate change to the financial system, which forms an essential part of our mandate to ensure the financial system operates in the best interests of consumers and the economy.

“When considering macroeconomic and financial system challenges, climate change is one crucial aspect. In the Central Bank we have prioritised our work on climate change to ensure that we, and the firms we regulate, are prepared to meet these challenges. Central banks can contribute to creating an environment where climate-related financial risks can be more efficiently assessed and considered, but first we must have clear definitions of what sustainable products and investments are.

“The green bond market is key to funding the delivery of climate goals. The Central Bank’s participation in the BIS green bond investment fund is consistent with our focus on climate change, which has also seen us establish a dedicated Climate Change Unit and work with international partners as a member of the Network for Greening the Financial System. This group enables central banks and supervisors to share experiences and best practices.

“In the latest of our Behind the Data series we can see that green bond holdings continue to grow across Europe, reflecting wider awareness of the need for sustainable instruments to mitigate the potential economic and financial losses of climate change. This increased awareness is also evident in the survey results published today, which show that certain good practices are already being embedded in insurance firms in relation to climate risk. However, there is work to do in terms of establishing plans and strategies. Firms can expect that the Central Bank will become increasingly active and intrusive in its approach to the supervision of climate-change related risks going forward.”

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