5.1 Introduction

Scientists virtually unanimously agree that the climate on Earth is changing. The Earth’s temperature is rising, leading to increases in extreme weather patterns such as droughts, storms and floods, as well as rising sea levels. The Intergovernmental Panel on Climate Change (IPPC) concluded in 2014 that without any mitigating measures, we face grave, widespread and irreversible consequences to the Earth’s climate system.1 Such consequences could have destabilizing effects on the economy and the financial system.2

Governments and society are increasingly aware of the need to avoid such a dangerous climate change. Important steps include the adoption of the United Nations 2030 Agenda for Sustainable Development3 and the signing of the Paris Agreement in 2015.4 In the Netherlands, the cabinet submitted a proposal for a Climate-Act (Klimaatwet) in June 2018.5

The Paris Agreement sets out a global action plan aimed at limiting global warming to well below 2°C, and to pursue efforts to limit the temperature increase even further to 1.5°C above preindustrial levels.6 It will take immediate and decisive action to actually reach those goals. In its 2018 Report “Global Warming of 1.5”C” the IPCC concludes that limiting global warming to 1.5”C would require rapid, far-reaching and unprecedented changes in all aspects of society.7 According to the European Commission, the financial sector has a key role to play here. The financial sector, being the main source of external finance for the European economy, can channel savings and investments towards more sustainable technologies and businesses. These private investments are necessary to fill the gap of approximately €180 billion per year to reach the Paris-set goals and ambitions, which gap cannot be filled by the public sector alone.8

The Commission urges to take action.9 Following the recommendations of the High-Level Expert Group on Sustainable Finance, dated January 2018,10 the EU has formulated an Action Plan for Financing Sustainable Growth (Action Plan), dated March 2018.11 The Action Plan aims to “reorient” capital flows towards sustainable investments. The plan also aims to contribute to financial institutions to better manage their financial risks stemming from climate change, as those risks may lead to financial losses. Finally, the plan calls for more transparency and long-termism in financial and economic activity. In May 2018, the EC presented its first batch of legislative proposals, following up on this Action Plan.12

Both climate change as well as the activities undertaken to limit it, including new European legislation, can have considerable impact on the Dutch financial sector. In its 2017 report, titled “Waterproof?”, the Dutch Central Bank (De Nederlandsche Bank or DNB) concludes that climate change can pose serious risks to financial institutions in the Netherlands, like banks and insurance companies.13

Against this background, Dutch financial supervisors intend to embed climate-related risks more firmly in their supervision of Dutch financial institutions. As part of this process the Dutch supervisors are identifying which regulatory provisions could, and perhaps should, form a basis for supervision on climate-related risks.14 This chapter poses the question whether fit and proper assessments of members of the management body can be regarded as one of the supervisory practices that financial supervisors may use to address climate-related risks.

To answer this question, in the next paragraphs, it is explored why Dutch financial supervisors are paying attention to climate change. This, as we will see, has everything to do with the increasing risks that both climate change as well as the transition to stop, or slow down, climate change pose to financial institutions (paragraph 5.2 and 5.3). The fourth paragraph presents a first and non-exhaustive overview of regulatory requirements that are likely to be relevant for financial supervisors in their supervision of climate-related risks. The integration of climate-related risks in fit and proper assessments is discussed in paragraph 5.5, answering the central question of this chapter. It is concluded that fit and proper assessments can, indeed, provide financial supervisors with additional tools to stimulate financial institutions to seriously address and mitigate climate-related risks in their businesses. Paragraph 5.6 concludes with some final remarks.

This chapter focusses on financial institutions regulated by the Dutch Financial Supervision Act (Wet op het financieel toezicht or Wft), like banks, insurers and asset-managers. Pension funds are not regulated by the Wft and are not furtherly discussed.15