5.3 The role of financial supervisors

In the Netherlands, financial supervision is conducted according to the so called Twin Peaks model. In this model AFM is the conduct of business supervisor for all financial institutions that are subjected to such supervision. Furthermore AFM is the lead supervisor for, among other institutions, investment firms and asset managers (like undertakings for collective investment in transferable securities (UCITS), UCITS-managers and alternative investment fund managers (AIFM). DNB is the prudential supervisor for all financial institutions subjected to such supervision and the lead supervisor for, among other institutions, insurance companies and pension funds. Financial supervision on Dutch banks is executed by the ECB and DNB together, leading to direct supervision of significant banks by the ECB, supported by DNB, and direct supervision of less significant banks by DNB.

In recent years, Dutch financial supervisors have been paying attention to climate change by, primarily, identifying and reporting on the risks that sustainability factors pose to financial stability and by participating in national and international bodies like the Financial Stability Board, the High-Level Expert Group on Sustainable Finance and the Central Banks and Supervisor Network for Greening the Financial System.1

However, DNB and AFM intend to also embed climate-related risks more firmly in their financial supervisory practices. DNB has selected “fostering a forward-looking and sustainable sector” as one of the three focus areas in its new Supervisory Strategy for 2018-2022. DNB will devote more attention to sustainability, including the impact of climate risks and policy on the financial sector. As part of this process, DNB will examine how sustainability risks can be included on a more systematic basis in its supervisory practices.

In its Agenda 2018, AFM has identified ten major risks for the financial sector. One of those is the risk that the financial sector, or AFM, do not devote sufficient focus on sustainability.2 AFM intends to explore possibilities to contribute to sustainability goals, in consultation with the financial sector, sustainability experts and other supervisory authorities. Also, AFM will integrate sustainability in its supervisory practices.

The ECB also recognizes the challenge posed by climate change, and shares the view that achieving the environmental goals of the Union,3 including those set out in the Paris Agreement, is of great importance to our societies. In this respect, the ECB finds that the correct pricing and supervision of financial risks stemming from climate change and environmental factors are key to promoting sustainable development and preserving a well-functioning financial system.4

According to Dutch law, prudential supervision is aimed at ensuring the financial solidity of Dutch financial institutions, as well as the stability of the financial system.5 Conduct of business-supervision is aimed at ensuring fairness and transparency within financial markets and the fair and conscientious provision of financial services to consumers and private investors (consumer protection). AFM performs these tasks to also ensure the stability of the financial system as a whole.6 As follows from paragraph 5.2, climate-related risks can have considerable impact on the solidity of financial institutions and the stability and integrity of the Dutch financial system. Dutch financial supervisors therefor find that supervising climate-related risks falls well within their mandate.7

The following paragraphs will take this as a starting point for further discussion.8 This is not to say, however, that specifically addressing ESG-related risks and considerations into EU-legislation and adding ESG-factors into the European and national supervisors’ legal mandate would not prove useful. This may help other supervisors to actually start integrating climate-related factors into their supervision, enhance international cooperation on climate-related supervision and contribute to a level playing field.