Central Bank of Iraq ESG Standards Guide for Banks 2024

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1 Table of Contents Introduction........................................................................................................... 3 Table (1) Abbreviations and Terms......................................................................... 5 Table (2) Definitions........................................................................................... 6 Part One: General Framework of the Guide.............................................................................. 10 Article (1): Scope of Application .................................................................................. 10 Article (2): ESG Standards Guide Framework for Banks )ESG )......... 10 Part Two: Board of Directors ................................................................................. 12 Article (3): Composition of the Board of Directors .......................................................................... 12 Article (4): Qualifications and Independence of Board Members................................................. 13 Article (5): Duties and Responsibilities of the Board of Directors........................................................... 14 Article (6): Duties and Responsibilities of the Chairman ................................................... 19 Article (7): Board of Directors Meetings...................................................................... 20 Article (8): Selection and Appointment of the Managing Director................................................................ 21 Article (9): Duties and Responsibilities of the Company Secretary ................................................ 21 Part Three: Sharia Supervision Authority .............................................................................. 23 Article )10(: Sharia Supervision Authority in Islamic Banks............................................. 23 Article )11(: Suitability of Sharia Authority Members in Islamic Banks.................................. 25 Part Four: Board of Directors Committees........................................................................... 26 Article )12(: Board of Directors Committees.......................................................................... 26 Article )13(: Conflicts of Interest and Code of Professional Conduct ......................................... 38 Part Five: Executive Management............................................................................. 40 Article )14(: Executive Management Committees........................................................................ 40 Article )15(: Executive Management .............................................................................. 42 Part Six: Supervision, Transparency and Disclosure ............................................................... 44 Article )16(: Internal Audit............................................................................... 44 Article )17(: Sharia Internal Audit..................................................................... 45 Article )18(: Relationship of the Board with External Auditor............................................................ 46 Article )19(: Relationship of the Board with Risk Management Function................................................. 46 Article )20(: Relationship of the Board with Compliance Management................................................... 47 Article )21(: Relationship of the Board with Anti-Money Laundering and Counter-Terrorism Financing Management...................... 48 Article )22(: Shareholders' Rights ............................................................................ 48 Article )23(: Relationship of the Board with Shareholders ...................................................... 49 Article )24(: Disclosure and Transparency........................................................................... 50 Part Seven: Stakeholder Relations Governance and Climate-Related Aspects ........................ 52 Article )25(: Stakeholder Relations Governance .......................................................... 52 Article )26(: Disclosure of Stakeholder Relations Governance........................................ 53 Article )27(: Climate-Related Issues )Aspects( Governance................................................. 53 Article )28(: Reporting on Climate-Related Issues )Aspects( Governance........................... 54 Appendix 1 - IFC-Approved Guidelines for Independent Board Members 56 .........................................................................................................)IFC( Appendix 2 - Iraqi Central Bank's Sustainability Principles ............................................. 57 Appendix 3 Standard Terms of Reference for the Sustainability Committee or Board Committee on Sustainability or ESG Standards. ........................................................... 58 Appendix 4 - Global P&S - Stages of Environmental and Social Governance Implementation for Banks .................... 63 Appendix 5 A - Contents of the Model Board Charter ..................................................... 64 Appendix 5 B - Contents of the Model Board Committee Charter.............................................. 64 Appendix 6 - Examples of Board Skills Matrix..................................................... 65 Appendix 7 - Model Annual Evaluation of the Board........................................................... 67 Appendix 8 - Example - Board Member Nomination Process.................................................... 70 Appendix 9 - Role and Qualifications of the Company Secretary......................................................... 71 Appendix :10 Model Disclosures for Annual Report and Website Disclosures....................... 72 Appendix -11 Reporting on Stakeholder Governance................................................ 76

3 Introduction The Central Bank of Iraq (CBI) plays a key role in Iraq's development, growth, and financial stability, as well as playing a key role in achieving the commitments made by the Iraqi government in 2019 regarding "The Future We Want - Iraq's Vision for Sustainable Development 2030". The CBI's strategy ensures that the banking sector's Environmental, Social, and Governance (ESG) performance is aligned with the CBI's vision for a sustainable banking system (Iraq's Financial Sustainability Roadmap 2023-2029) and sustainable financing in Iraq, compared to its peers in global markets and similar institutions. In 2024, the CBI issued a mandatory ESG Standards Guide for Banks. This guide aims to keep pace with international developments and enhance governance of banking ESG standards, applying best practices in the banking sector, particularly regarding ESG practices. The CBI established and applied global expectations and standards for ESG, introducing legislative and supervisory structures and requirements. "The increasing demand from investors for sustainable financial products, as well as the growing pressure from regulatory bodies, highlights the need for banks to consider ESG risks within their risk management framework." This guide also aims to support Iraq's banking sector in maximizing the opportunities offered by ESG standards and mitigating exposure to ESG risks, particularly those related to climate change. Investors tend to engage with banks that have good ESG structures, policies, and practices, demonstrating responsiveness to ESG risks. Changes in good governance practices for banking ESG standards alter the relationship between the bank's board of directors and executive management, ultimately protecting depositors', shareholders', and stakeholders' funds. A sustainable bank capable of withstanding ESG risks must be ensured. All banks supervised by the CBI must apply this guide's requirements.

1 KPMG ESG Risks in Banks, accessible via: https://kpmg.com/xx/en/home/insights/2021/05/esg-risks-in-banks.html

4 Systemically Important Domestic Banks (DISBs) will be subject to additional requirements issued by the CBI, which may be stricter than those in this guide, reflecting their importance to the Iraqi economy. This guide was developed according to international best practices and relevant Iraqi laws, including standards issued by the International Finance Corporation (IFC), Organisation for Economic Co-operation and Development (OECD), Basel Committee on Banking Supervision (BCBS), Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB), and the International Sustainability Standards Board (ISSB) under the IFRS Foundation. This guide will help each bank improve its ESG framework, leading to better performance. Board members and executive management must supervise the bank's operations and activities to preserve the rights of customers, shareholders, and stakeholders. This guide was reviewed and updated in June 2024. It consists of seven (7) parts: Part One - General Framework for Banking Governance and Supervision of Environmental and Social Issues. Part Two - Composition of the Board of Directors. Part Three - Sharia Supervision Authority. Part Four - Board of Directors Committees. Part Five - Executive Management. Part Six - Supervision, Transparency and Disclosure. Part Seven - Stakeholder Relations Governance related to Climate. We extend our gratitude to the International Finance Corporation (IFC) for its continuous support of the CBI in the field of banking ESG standards.

5 Table (1) Abbreviations and Terms No. | Abbreviation | Term 1 | CBI / البنك المركزي العراقي | Central Bank of Iraq 2 | المصرف المصارف المرخصة من قبل البنك المركزي العراقي وتشمل المصارف التجارية والإسلامية. | Bank(s) Licensed by the Central Bank of Iraq, including commercial and Islamic banks. 3 | مجلس الإدارة مجلس إدارة المصرف | Board of Directors / Bank's Board of Directors 4 | الهيئة العامة )AGM)/ الهيئة العامة غير العادية )EGM) | General Assembly (AGM) / Extraordinary General Assembly (EGM) 5 | الهيئة الشرعية الهيئة الشرعية في المصرف الإسلامي | Sharia Authority / Sharia Supervision in Islamic Banks 6 | رأس مال المصرف رأس المال المدفوع | Bank's Capital / Paid-up Capital 7 | مكتب مكافحة غسل الأموال مكتب مكافحة غسل الأموال وتمويل الإرهاب | Anti-Money Laundering Office / AML and Counter-Terrorism Financing Office 8 | IFC مؤسسة التمويل الدولية | International Finance Corporation 9 | OECD منظمة التعاون الاقتصادي والتنمية | Organisation for Economic Co-operation and Development 10 | AAOIFI هيئة المحاسبة والمراجعة للمؤسسات المالية الإسلامية | Accounting and Auditing Organization for Islamic Financial Institutions 11 | IFSB مجلس الخدمات المالية الإسلامية | Islamic Financial Services Board 12 | فريق العمل )التابع لمجلس الاستقرار المالي( المعني بالإفصافات المالية TCFD | Task Force on Climate-related Financial Disclosures (under the Financial Stability Board) 13 | ISSB مجلس المعايير الدولية للاستدامة التابع للمؤسسة الدولية لإعداد التقارير المالية )IFRS( | International Sustainability Standards Board (under the IFRS Foundation) 14 | ESRM نظام إدارة المخاطر للمعايير البيئية والاجتماعية | Environmental and Social Risk Management System 15 | ERM نظام إدارة المخاطر على مستوى المصرف | Enterprise Risk Management System 16 | ESMS نظام الإدارة للمعايير البيئية والاجتماعية | Environmental and Social Management System 17 | ICT تقنية المعلومات والاتصالات | Information and Communications Technology 18 | ESG المعايير البيئية والاجتماعية والحوكمة المؤسسية | Environmental, Social, and Governance Standards 19 | SIB-D المصرف المحلي المهم نظامي | Systemically Important Domestic Bank (SIB-D) 20 | ESGSC لجنة المعايير البيئية والاجتماعية والحوكمة المؤسسية والاستدامة التابعة لمجلس الإدارة | ESG and Sustainability Committee (under the Board of Directors)

6 Table (2) Definitions No. | Term | Definition 1 | الحوكمة المؤسسية (Corporate Governance) | A comprehensive set of systems defining the relationship between the bank's board of directors, executive management, shareholders, and other stakeholders. It covers how the bank is directed and supervised by the board, affecting:

• The bank's strategy, including ESG strategies.
• Risk management, including environmental and social risks.
• Bank operations.
• Balance between shareholders' rights and depositors' interests, considering other stakeholders.
• Compliance with all applicable laws, regulations, and rules.
• Disclosure practices ensuring full transparency in material aspects (financial and non-financial). 2 | الملاءمة (Suitability) | Meeting the minimum legal requirements for board members, Sharia authority members in Islamic banks, and executive management. 3 | الإدارة التنفيذية (Executive Management) | Senior employees as stipulated in Article (1) of Banking Law No. 94 of 2004, under CBI instructions and banks' organizational structure. 4 | الحيازة المؤهلة (Qualifying Ownership) | Any natural or legal person(s) or affiliated group intending to contribute more than 10% of the bank's subscribed capital. The CBI must be notified at least 10 days prior to obtaining approval before executing the ownership individually or as an affiliated group. 5 | الأشخاص ذوو العلاقة (Related Persons) | Includes:
• Related person as defined in Article (1) of Banking Law No. 94 of 2004 and IAS 24.
• Any director, managing director, deputy, or advisor who served at the bank in the past two years.
• Independent external auditor throughout their term and for two years following contract expiration.
• Any natural or legal person with a contractual relationship with the bank during the contract period. 6 | المجموعة المرتبطة (Affiliated Group) | A group of individuals or companies linked by kinship or influential economic interests. 7 | عضو مجلس الإدارة المستقل (Independent Board Member) | A non-executive board member free from any other work or affiliation with the bank, independent and not conflicting in interests when making decisions. They enjoy full independence from management and the bank, free from unjustified influences. See also IFC standards in Appendix (1). 8 | عضو مجلس الإدارة التنفيذي (Executive Board Member) | A board member who is also part of the bank's executive management, supervises daily operations, and receives a monthly salary. 9 | عضو مجلس الإدارة غير التنفيذي (Non-Executive Board Member) | A board member who may be related to or have an interest in the bank through share ownership, as a customer/advisor, providing services to the board or management. They do not participate in daily management, receive no monthly salary, and are not considered independent. 10 | الأمور الجوهرية (Material Matters) | Matters important to investors, shareholders, or stakeholders that may affect investment decisions or change the market share price. 11 | التصويت التراكمي (Cumulative Voting) | A voting method for all General Assembly decisions, including board member elections. Each shareholder's votes equal their share count. Shareholders may vote all votes for one candidate or distribute them without repetition. Main goal: increase minority shareholders' representation and limit one shareholder's dominance. 12 | الصالح والمناسب (Fit and Proper) | All board members meet requirements of Banking Law No. 94 (2004) and Companies Law No. 21 (1997) and amendments. The bank manager must have a good reputation, banking/financial experience, be independent, free from conflicts of interest, and commit necessary time to perform board duties. Collectively, they contribute to overall board suitability. 13 | المعرفة المالية (Financial Knowledge) | Ability to understand accounting's role and analyze financial reports, with skills in budgeting, investment, borrowing, taxation, auditing, insurance, and personal financial management. 14 | الخبير المالي (Financial Expert) | A highly skilled and professionally qualified person in several areas:
• Understanding IFRS accounting principles, financial statements, and reporting processes.
• Experience preparing/auditing bank financial statements.
• Experience in accounting for estimates, accruals, and provisions.
• Understanding bank's accounting and internal audit controls.
• Experience in the bank's audit committee role.
• Adequate awareness of current legislation and developments in financial reporting. 15 | الفروع المصرفية/الشركات التابعة له (Bank Branches/Affiliated Companies) | Any bank branches or other legally affiliated companies, including joint ventures. 16 | التمويل المستدام (Sustainable Finance) | Any banking or financial service integrating ESG standards into business/investment strategy, policies, and decisions for sustainable benefit to customers and society. 17 | ESMS - نظام الإدارة البيئية والاجتماعية (ESMS) | Tools to evaluate or self-assess a bank's ESG management practices, measuring them against good market practices in environmental and social aspects. 18 | ESRM - نظام إدارة المخاطر للمعايير البيئية والاجتماعية (ESRM) | Policies, procedures, and tools to identify, assess, monitor, manage, or mitigate exposure to environmental and social (S&E) risks. It is an integral part of the bank's risk management. 19 | المساهمون (Shareholders) | Also known as "investors", they are the share owners of the bank. 20 | أصحاب المصالح (Stakeholders) | All groups or persons interested in the bank's activities, products, services, and profitability, which can affect or be affected by them. Includes shareholders, investors, employees, regulators, government authorities, customers, depositors, borrowers, suppliers, and society as a whole. 21 | الجوانب المتعلقة بالمناخ (Climate-Related Aspects) | Climate change risk aspects and opportunities in short, medium, and long terms, including physical climate issues and transition-related issues. 22 | خطوط الدفاع الثلاثة (Three Lines of Defense) | A globally applied principle-based risk management model by the Institute of Internal Auditors (IIA). First and second lines involve management's risk responsibilities; third line requires internal audit/review to provide independent assurance to the board on enterprise-wide risk management effectiveness. 23 | هو/له/هؤلاء (He/Him/These) | All masculine references in the guide also apply to feminine forms.

10 Part One: General Framework of the Guide Article (1): Scope of Application

1. This guide applies mandatorily to all banks operating in Iraq from the date of its issuance.
2. Branches of foreign banks are exempt from all provisions related to the board of directors and committees.

Article (2): ESG Standards Guide Framework for Banks Given the importance of ESG practices and in line with international standards and practices, banks must:

1. Form a board-derivative committee called the ESG and Sustainability Committee (ESGSC), as per the committees section (see Part Four).
2. The ESGSC prepares the bank's ESG Standards Guide, a framework for governance regarding ESG standards that must be approved by the board. The bank's ESG guide must align with minimum requirements in this guide, include clear procedures for complying with the Sustainable Financing Roadmap (2023-2029) issued by this bank and the Sustainability Principles (Appendix 2), and be updated annually to keep pace with CBI controls, instructions, and ESG developments.
3. Board members must publicly disclose in the annual report and on the website their commitment to this guide's requirements, sustainability principles, and the bank's ESG Standards Guide. The CBI may periodically adjust/develop sustainability principles to align with global developments.
4. The bank must prepare and clearly publish its ESG Standards Guide internally, incorporating it into the bank's strategy. It must include at least: a. The bank's purpose. b. Core values. c. Commitment to business integrity. d. Key banking policies. e. Governance structure. f. Commitment to business integrity, long-term sustainability, and managing all risks, including ESG and climate-related risks.
5. The bank must develop and publish an annually updated board charter approved by the board, defining roles/responsibilities of members, chairman, and other key roles. The charter (see Appendix 5) must specify at least: a. Board composition. b. Duties of the full board and each member. c. Authority scope of the full board and each member. d. Procedures the board follows in performing duties. e. Authority of each committee, including details on handling sustainability and climate responsibilities.
6. The board must establish policies/procedures to understand/support this guide, providing development programs for the board and executive management as needed.
7. The board must adopt and monitor implementation of the code of professional conduct and conflict of interest policies applied to all board members and bank employees, publishing them on the website.
8. The board is responsible for ensuring establishment, training, and maintenance of a team skilled in corporate governance, sustainability/climate risk developments, and reporting for this guide. The team is authorized to accurately assess compliance with this guide and report as requested by the bank. The board supports the team by providing authority, resources, and systems for information to enable accurate reporting.
9. Reports to this bank regarding compliance with banking ESG standards must not be submitted by untrained/inexperienced individuals. The ESGSC must review the accuracy of reports submitted to the CBI, and the Managing Director and Chairman must sign and attest to their accuracy.
10. This bank defines the method/style for annual reporting on compliance with this guide's requirements. Each board ensures the bank and staff have necessary information, skills, and technologies for accurate reporting.
11. The board and executive management must ensure compliance reports are integrated into annual board/management activities, bank strategies, policies, and practices.
12. The bank must publish the banking ESG Standards Guide and other key documents on its website for public access, ensuring regular updates, reviews, and understanding by all board members and staff.
13. Banks may collaborate with corporate governance centers or others for training, consulting, and assistance in meeting this guide's requirements according to ESG best practices.

12 Part Two: Board of Directors Article (3): Composition of the Board of Directors

1. The bank's board of directors is the final decision-maker, responsible for supervising sound and prudent management of the bank and its subsidiaries. The board must be professional, competent, and possess necessary skills, knowledge, and experience to fulfill its duties. Each member must apply strategic thinking to any issue and constructively challenge others' thinking, possessing skills/knowledge/experience including in IT as applied to financial institutions, and risks/opportunities for ESG standards to ensure the bank's safety and sustainability.
2. Board members are elected in the General Assembly meeting after CBI approval for a four-year term, with possible re-election for an additional four years upon re-election in the General Assembly.
3. The board must ensure regular participation and receive/understand/respond to information regarding shareholders' and stakeholders' issues and interests.
4. The board consists of non-executive members, including a majority of independent members, except for one member who is the Managing Director, and must be in management.
5. There must be at least seven members at all times, with at least one-third or four independent non-executive board members (see Appendix 1). At least one independent member must represent minority shareholders. The board composition must include at least one woman, at least one member with sufficient skills in ESG and sustainability standards and climate change affairs, and at least one member with sufficient skills in technology...