5.5.1 Why fit and proper-testing?

Taking stock of the regulation and supervision of climate-related risks, fit and proper-testing of the members of the management body may not be the first supervisory tool that springs to mind. However, whereas the financial regulation mentioned in paragraph 5.4 applies to financial institutions, “financial institutions” are, of course, merely abstract concepts. Companies always act by way of the people in it.

It can be concluded from the previous paragraphs that within financial institutions a thorough understanding of climate-related risks is imperative, combined with an assessment on how these risks will affect the businesses. Climate-related risks may affect almost every aspect of the business, be it investing, lending or providing financial advice, products and services to (retail) clients. In this respect, some speak of a “paradigm shift” in the financial sector, moving from (short-term) profitability towards (long term) sustainability. This change of perspective may well affect the entire organization. The need to identify and mitigate climate-related risks may entail the need to radically change existing strategies and business models. Internal risk and integrity policies, decision-processes and measures may have to be adapted to the new reality. And finally, all employees in all layers of the organization have to show commitment to the new rules, goals and ambitions, and good intentions must be put into practice.

It is the responsibility of the management body, “people of flesh and blood”, to take the lead in this process. It is, after all, the core responsibility of the management body to set, approve and oversee the implementation of the institution’s strategic objectives, risk strategy and internal governance.1 Against this backdrop, the question of the suitability of the members of the management body in relation to climate change may not seem that exotic any more.

In the next paragraph, a brief overview of Dutch fit and proper-regulation is presented (paragraph 5.5.2), followed by views and suggestions on how to integrate climate-related risks into fit and proper processes and assessments (paragraph 5.5.2). The definition of “management body”, in this chapter, is used to describe both the executive board and the supervisory board, or, in a one-tier board structure, both the executive and non-executive members of the board.