Richard Bruton (Dublin Bay North, Fine Gael)
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241. To ask the Minister for Finance if he will outline the obligations on the banking sector to demonstrate its compliance with climate targets and other elements of the EU Green Deal; if it is expected to have a direct impact on lending decisions; and if he will make a statement on the matter. [14801/23]

Michael McGrath (Cork South Central, Fianna Fail)
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Obligations on the banking sector related climate targets and other elements of the EU Green Deal are set out in a number of EU Directives and Regulations, some of which are in force with others being developed. These include the Taxonomy for sustainable activities, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), as well as others.

The EU Taxonomy sets out standards by which various economic activities can be considered sustainable, and requires institutions to disclose how, and to what extent, their activities are associated with environmentally sustainable economic activities.

The SFDR, in effect since March 2021, aims to prevent greenwashing by ensuring accurate disclosure of the sustainability of investments. It applies to many financial market participants and advisors who must make disclosures on the sustainability impacts and risks of products.

The CSRD, in effect since January 2023, with reporting to begin from January 2024, is currently being transposed. Credit institutions, including banks, are required to report annually on environmental, social and governance matters, including human rights, according to mandatory EU sustainability standards.

This reporting must include descriptions of plans and actions to ensure that a company’s business models and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement, including absolute greenhouse gas emission reduction targets for 2030 and 2050.

The European Green Bond regulation is in the final stages of reaching agreement between Council and European Parliament. When in force, it will set out the requirements that a bond must meet in order to be considered green, namely Taxonomy alignment with transparency and supervision provisions.

The Corporate Sustainability Due Diligence Directive (CSDDD) had its general approach agreed in December 2022. The proposal aims to establish a system within company law and corporate governance to address adverse human rights and environmental impacts arising from companies' own operations, their subsidiaries' operations and their supply and value chain activities. It will require companies to adopt a plan to ensure that their business model and strategy is compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C, in line with the Paris Agreement.

Other legislation with climate elements that the banks may need to take into consideration include; the Environmental Social and Governance (ESG) Risk Disclosure Standards, the Benchmark Regulation, as well as elements within the Capital Requirements Directive (CRD IV), the Capital Requirements Regulation (CRR), and Solvency II.

This inter-linked system of sustainability legislation has been developed and agreed in recent years. It is comprehensive and requires significant efforts by companies, including those in the banking and financial services sector.

Furthermore, with regard to banks and lending, the July 2022 European Central Bank (ECB) stress test, which included Bank of America, Barclays Bank Ireland, AIB, and Citi Bank, focused on transition risk and physical risk. This included three scenarios: Net-Zero 2050, delayed transition, and hot-house world . While conclusions from the results raised concerns about banks’ long term climate risk modelling capabilities, the Irish banks were determined to have minor gaps in their plans when bench-marked against peers.

By 2024, the ECB expects institutions to be fully aligned with all supervisory expectations, as well as having reached the following milestones as a minimum:

- by the end of March 2023 at the latest, to have in place a sound and comprehensive materiality assessment, including robust scanning of the business environment;

- by the end of 2023 at the latest, to manage climate and environmental (C&E) risks with an institution-wide approach covering business strategy, governance and risk appetite, as well as risk management, including credit, operational, market and liquidity risk management;

- by the end of 2024 at the latest, to be fully aligned with all supervisory expectations, including having in place a sound integration of C&E risks in their stress testing framework and capital requirements.

The European Banking Authority (EBA) is also planning a data collection exercise of climate risk-related starting points to support the European Commission’s one-off stress testing exercise for the Fit-for-55 package. The data collection will also benefit ECB Banking Supervision, providing insights into whether banks are closing data gaps identified in the 2022 Climate risk stress test and help assess alignment of banks with the ECB report on good practices for climate stress testing.

As part of ongoing supervision activities the Central Bank of Ireland is actively engaging with institutions to ensure that Irish banks are aligned with the supervisory expectations by 2024. As noted in a recent assessment by the IMF as part of Ireland’s FSAP mission, the Irish banking system’s direct exposure to climate risks is not insignificant. Roughly 15 percent of bank non-financial corporation (NFC) loans are to sectors with a high carbon footprint and more than 20 percent of loans are to sectors exposed to high physical hazards, dominated by floods, well above the Euro Area average, suggesting heightened vulnerability of banks to both carbon tax shocks and sea level rises.

The measures I have described have a range of purposes and an impact on lending is one of these purposes: in particular, it is encouraging investors and consumers to make more sustainable decisions through science-based definitions of sustainability and with transparent reporting and disclosures of sustainability impacts and risks.