Regulatory Alerts2024-01-25
Circular 28/2023: General Framework for ESG Governance
The Central Bank of Libya issued Circular 28/2023 to establish a mandatory general framework for Environmental, Social, and Governance (ESG) governance across all Libyan banks. The directive requires financial institutions to integrate climate and sustainability risks into their strategic planning, risk management frameworks, and credit policies, while implementing phased reporting, carbon footprint measurement, and internal ESG performance evaluations. Banks must align with international standards, adopt green financing practices, and submit periodic disclosure reports to the regulator to ensure long-term financial stability and national sustainable development.
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Central Bank of Libya P.O. Box 1103, Telex: CBL-Libya, Tripoli, Libya
Ref: A.R.M.N. 804 Circular A.R.M.N. No. (28/2023) Date: 27 Jumada al-Awwal 1445 Corresponding: 11 December 2023
To: Presidents of Boards of Directors and General Managers of Banks To: Presidents of Boards of Directors and General Managers of Specialized Banks
Subject: General Framework for ESG Governance
Based on the provisions of Law No. (1) of 2005 concerning Banks and its amendments, and in fulfillment of the supervisory and regulatory role of the Central Bank of Libya, and to reinforce the principle of effective institutional governance of information technology.
With reference to Circular A.R.M.N. (2010/13) issued on 27 September 2010, concerning the circulation of the Board of Directors of the Central Bank of Libya Decision No. (20) of 2010 approving the Governance Guide for the Libyan Banking Sector.
With reference to Circular A.R.M.N. No. (2023/21) issued on 10 July 2023, concerning the circulation of the Information Technology Governance Guide.
With reference to Circular A.R.M.N. No. (2023/25) issued on 20 August 2023, concerning the circulation of the Islamic Banking Governance Guide.
Therefore, we attach to you the General Framework for ESG Governance for implementation according to the application mechanism outlined within the framework.
Peace be upon you,
Naji Muhammad Isa Director of Banking and Currency Supervision Department
Copies to: Mr. / The Governor Mr. / The Deputy Governor Mr. / Deputy Director of Banking and Currency Supervision Department for Office Supervision and Compliance Monitoring Mr. / Deputy Director of Banking and Currency Supervision Department for Inspection Mr. / Deputy Director of Banking and Currency Supervision Department for Islamic Banking Affairs Gentlemen / Banking Supervision, Benghazi Gentlemen / Heads of Compliance Units in Banks (for follow-up)
Phone: +218 21 222 333 3591, Fax: +218 21 444 1488 218+, SWIFT Code: CBLJLYLX, www.cbl.gov.ly
Central Bank of Libya Banking Supervision Department
General Framework for ESG Governance
Banking Supervision Department
Table of Contents
| Item | Page |
|---|---|
| Introduction | 3 |
| General Considerations | 5 |
| Sustainable Development and Libya's International Agreements | 6 |
| ESG Governance Standards | 7 |
| Disclosure and Periodic Reporting Methodology | 9 |
| Periodic Performance Evaluation | 11 |
| Risk Assessment and Management | 12 |
| Implementation Mechanism | 13 |
| General Principles, Guidelines, and Directives | 14 |
| Appendices | 19 |
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Banking Supervision Department
1 - Introduction:
In light of the Central Bank of Libya's alignment with global trends and the development of the banking sector to operate according to the latest international standards, in harmony with banking service developments, and amid the growing and accelerating interest in sustainable development, its long-term importance within community development, economic and financial stability, resource conservation, and environmental protection, amidst numerous initiatives, charters, treaties, and global agreements related to development and climate change, most notably the Sustainable Development Goals (SDGs) and the Principles for Responsible Banking, and Net Zero commitments issued by the United Nations, and the Principles for Effective Management of Climate-Related Financial Risks issued by the Basel Committee on Banking Supervision, where the UN defined sustainable development as "meeting the needs of the present without compromising the ability of future generations to meet their own needs," according to the 1987 report of the World Commission on Environment and Development. Therefore, long-term plans are required that balance current needs while ensuring future needs are met, aiming to provide an attractive, stimulating, and sustainable investment climate.
Thus, it can be said that Libya faces immense challenges, similar to the rest of the world, especially following the natural disaster that struck the cities of Jabal al-Akhdar in September 2023. The situation now requires establishing new rules and taking important and urgent steps forward. Resource conservation, climate change, social responsibility, corporate governance, financial inclusion, and other critical issues have become priorities for all relevant institutions, necessitating the adoption of local measures at the banking sector level to enhance the provision of responsible banking services. There is an urgent need to integrate these challenges into the strategic plans of our banks and financial institutions, and our collective success will be measured by the extent to which our institutions contribute to these important dimensions and through our cooperation and collective action to confront challenges and create genuine development for society.
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Within the framework of the Central Bank of Libya's efforts to enhance and encourage the banking sector to play its role in this regard, due to its importance and active contribution to achieving sustainable development goals, and given the Central Bank of Libya's commitment to giving this aspect due attention by establishing directions, rules, foundations, and general principles for sustainable finance, so that Libyan banks become active contributors and fully exercise their role, continuing their service to the national economy and its growth, the Central Bank of Libya is striving to take significant and important steps to apply international standards and best practices related to sustainable green finance.
Therefore, to adopt the concept of sustainability and its standards in our banking sector, as an initial awareness step followed by subsequent steps adopting mandatory disclosure standards, this General Framework includes the general directions for commencing the application of ESG governance standards.
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2 - General Considerations:
The issuance of this General Framework for the banking sector comes due to the pivotal and fundamental role the banking sector plays in directly and significantly contributing to community development, and its impact on other economic sectors to ensure the achievement of national goals and sustainable development for current and future generations. The most important of these considerations are summarized as follows:
- Protecting the banking sector from any crises or natural disasters, and ensuring its ability to face any losses resulting from climate change, preserving its financial adequacy, and enhancing the credit rating of the sector and the country as a whole.
- The significant impact on the banking sector resulting from climate change and weather fluctuations, and the rising risks and potential losses to the bank or sector as a whole, whether to the bank's assets, supplier companies, individual or corporate customers, or regarding granted or targeted credit, or existing or targeted collateral. There is a need to regulate this aspect to hedge and mitigate potential risks to the banking sector and the national economy as a whole.
- Effective contribution and commitment to ratified international agreements and charters regarding climate change and sustainable development, aiming to achieve banking activities and a low-carbon, low-emission economy, preserving natural resources and the environment, by developing strategic plans and business models for banks and influencing companies and investors to develop, innovate, and provide environmentally friendly products and services that contribute to the development of all societal segments.
- Potential losses resulting from climate change, phenomena, and natural disasters, which are difficult to predict and may occur at any time. This necessitates that everyone (without exception) take precautions, study and assess potential risks, and evaluate the impact on the bank, sector, or national economy.
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- The impact on any bank, the banking sector, or the national economy as a result of affiliation with external banks and financial institutions that are affected by climate change, phenomena, and natural disasters.
- The impact on the bank, sector, and national economy through the transition to adopting the sustainable development concept and shifting to a low-carbon economy. There are transition risks that must also be studied, managed, and their expected impacts and losses mitigated.
- Supporting the localization of environmentally friendly technologies and innovating responsible banking services that guarantee a high level of privacy and personal data protection for customers.
- Ensuring the banking sector keeps pace with international developments, aligns with them, applies international standards, adopts best practices, and establishes the foundations for providing responsible banking services, thereby contributing to genuine sustainable development for society.
3 - Sustainable Development and Libya's International Agreements:
The United Nations and its affiliated organizations, committees, and commissions have consistently played a major role in establishing the foundations of sustainable development, starting from the first World Environment Conference in 1972 to the present day, and have established several agreements, charters, and programs aimed at preserving resources, protecting the environment, reducing climate change risks, and developing communities. Since our country is a member of the UN, the Libyan state has ratified agreements and charters related to sustainable development, the most important of which are:
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Kyoto Protocol: The agreement aims to combat global warming and climate change by reducing greenhouse gas emissions in the atmosphere. Libya ratified the agreement in 2006.
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Paris Agreement: The agreement includes commitments from all countries to reduce their emissions and work together to adapt to the effects of climate change, transitioning toward a low-carbon world. It aims to significantly limit greenhouse gas emissions and limit global temperature increase this century to 2 degrees Celsius, with efforts to limit the increase to 1.5 degrees. Libya ratified the agreement in 2021.
4 - ESG Governance Standards:
ESG governance standards revolve around three basic criteria, known as the Triple Bottom Line or ESG Governance, adopted by international organizations and global institutions as a framework for implementing sustainability, as it is capable of achieving effective results for a bank's or financial institution's contribution to society, creating a positive impact characterized by resource conservation, respect for future generations' rights, environmental protection, consideration of climate change risks, and contribution to genuine community development. These standards are represented in three categories as follows:
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Environmental Standards: Encompass, in general, the impact of the bank or financial institution on weather fluctuations, climate change, phenomena, and natural disasters, as well as the impact resulting from the bank's or institution's operations and activities on the environment. Examples include:
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Environmental impact of internal operations.
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Climate change.
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Waste and refuse management.
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Environmental impact of the supply chain.
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Sustainable financing, investment, and products.
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Emission volume and carbon footprint.
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Social Standards: Include several criteria focusing on the institution's contribution to genuine human community development, as well as its consideration and commitment to diversity and financial inclusion for customers, workforce diversity, occupational health and safety conditions in the work environment, customer satisfaction, and levels of data confidentiality and privacy protection. Examples include:
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Financial inclusion.
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Customer satisfaction.
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Privacy and data security protection.
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Occupational safety and health.
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Employment standards, equal opportunity, and work environment welfare.
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Innovation and digital transformation.
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Human rights.
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Responsible supply chains.
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Community initiatives.
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Investment in human capital.
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- Governance Standards: These are criteria related to organizing relationships and distributing rights and responsibilities within the bank or financial institution, whether for the Board of Directors, executive management, shareholders, or key stakeholders, preventing conflicts of interest, and enhancing professional commitment. Examples include:
- Corporate governance.
- Professional conduct rules.
- Cybersecurity.
- General framework and sustainability strategy.
- Financial performance.
- Disclosure and transparency.
- Responsible banking.
- Anti-corruption policy.
Applying these standards will achieve many advantages and benefits for the bank, financial institution, and the country as a whole, including, but not limited to: enhancing brand value, meeting key stakeholders' expectations and gaining customer satisfaction, providing a motivating work environment, reducing costs and increasing operational efficiency, providing sustainable financing and green banking that considers environmental conservation and climate change risks, increasing financial inclusion rates, improving the investment climate, and making a direct and effective contribution to community development.
5 - Disclosure and Periodic Reporting Methodology:
Due to the different types of reports and their objectives, some are for internal assessment and others for stakeholder disclosure, the most important required reports can be specified as follows:
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Annual ESG Disclosure Report: Global initiatives have provided a methodology for sustainability reporting and its axes in general, aiming to help companies and institutions present their reports and disclose their positive contribution to applying and achieving sustainable development. Any bank may choose one, provided the initiative is issued by a reliable, independent, non-profit institution, and receives prior approval from the Central Bank. Additionally, the methodology must remain consistent unless instructed otherwise by the Central Bank in the future. Given the expanding concept of sustainability, the report will be specified according to ESG governance standards (Environmental, Social, Governance), and must be published on the bank's website and approved media channels after an audit by the Internal Audit Department and approval by the Board of Directors, until a specific international disclosure standard is adopted.
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Semi-Annual General Internal Assessment Report: A dedicated report on ESG governance, presented by executive management as an internal report to the Board of Directors. It is supported by the Internal Audit Department's opinion for follow-up, assessment, development, and performance improvement purposes. It includes Key Performance Indicators (KPIs), goal assessment, deviation levels, and recommendations, primarily measuring the carbon footprint. A copy is sent to the Central Bank of Libya.
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Semi-Annual Green Sustainable Financing Portfolio Report: A report submitted by the relevant executive management department, detailing the volume and growth rates of the bank's activities toward providing sustainable financing, its percentage of the total credit portfolio, and details of granted financing or credit. It includes recommendations on how to increase performance rates and the volume of sustainable green financing compared to the portfolio size.
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- Quarterly Report: It is well known that periodic quarterly reports are submitted to the General Manager and the Board of Directors. These reports will be required to include, in part, independent axes regarding ESG governance and the developments and improvements made, enabling decision-makers to assess and perform their duties successfully.
6 - Periodic Performance Evaluation:
Until a local ESG rating agency is established or participation in an international rating agency is secured, and until sector-specific indicators are issued in the future, banks can conduct periodic performance evaluations by performing internal assessments compared to a baseline, through analyzing differences or gaps as a first step (Gap Analysis), followed by continuous improvement to achieve the best possible performance rates and indicators (KPIs) according to locally available data.
Banks may also conduct a semi-annual evaluation, guided by the attached model in the Appendices (Paragraph 2.9), where weights are distributed for each percentage of the sub-criteria for ESG governance. The evaluation then produces a percentage or final rate as a result of achievement, classification, and self-assessment of the bank, following the same approach used by global rating agencies in the field of ESG governance.
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7 - Risk Assessment and Management:
Given the high probability of the bank and sector as a whole being affected by risks associated with adopting the sustainability concept in general, and climate change risks in particular, it is necessary to give due attention to this very important aspect of accompanying banking risk management, and to take necessary measures by all components of the organizational structure. It is a collective responsibility of the three lines of defense to confront challenges through collective action, by taking the following measures:
- Update the bank's general risk management framework to include ESG governance risks, submitting a copy to the Central Bank of Libya after incorporating this aspect.
- Establish a database at the bank to assess climate change and sustainability adoption risks, presenting them within quarterly management activity reports and regulatory reports.
- Provide a risk assessment and include a section on progression within the Internal Capital Adequacy Assessment Process (ICAAP) assessment report.
- Risk assessment factors (Risk Drivers) should be the same factors and ESG governance criteria according to their classification, in addition to assessing climate change risks, calculating the carbon footprint, and ESG governance, while creating necessary tools to control these risks and mitigate their potential impact.
- It is important to consider assessing climate change and ESG governance risks, as they are directly related to reputation risk, operational risk, strategic risk, financing/investment/credit risk, and legal risk.
- Work on conducting necessary stress tests and scenario analyses to predict and hedge against climate change risks, and assess their impact on the bank's performance indicators, capital adequacy ratio, and liquidity ratios.
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- Consider the assessment of transition risks for the shift to green banking and sustainable financing, and the potential losses the bank may incur as a result, along with how to take necessary hedges and measures to mitigate and reduce their effects.
- Continuous awareness of the three lines of defense on how to exercise due diligence regarding so-called "Greenwashing," to protect the bank's assets and protect society as a whole from any improper or non-compliant practices.
8 - Implementation Mechanism:
Based on current data, and considering the circumstances our beloved country is going through, and based on the importance and necessity of keeping pace with global developments, and completing the construction and development phase of the banking sector, and following a methodology for the smooth transition to applying the ESG concept and strategy, implementation will proceed according to the following timeline:
| No. | Item | Timeframe |
|---|---|---|
| 1 | Awareness and Training Phase | January 2024 to June 2024 |
| 2 | Initial Implementation Phase, including: | March 2024 to December 2024 |
| 2-1 | Carbon footprint measurement for general administration. | End of June 2024 |
| 2-2 | Carbon footprint measurement for general administration and branches for internal operations. | End of December 2024 |
| 2-3 | Selecting the application of three different criteria from each of the Environmental, Social, and Governance standards (three from each axis) | March 2024 to December 2024 |
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| 3 | Issuance of 2024 Sustainability Report (Summary Report) | End of January 2025 |
|---|---|---|
| 4 | Preparing the bank's General Framework for ESG Governance and obtaining Board of Directors approval. | End of June 2025 |
| 5 | Full Implementation Phase | Starting January 2025 |
| 6 | Phased application of International Sustainability Standards | Starting January 2026 |
9 - General Principles, Guidelines, and Directives:
According to the nature of the phase, and within the framework of a smooth and purposeful transition that considers local data and specifics, focusing on quick and achievable achievements in studied steps to achieve major national goals that benefit all society, the following are the general principles, guidelines, and directives for the gradual transition to applying ESG governance, taking into account the Principles for Effective Management of Climate-Related Financial Risks issued by the Basel Committee on Banking Supervision. These principles will serve as the framework for the next phase to achieve progress and development for the banking sector to be compatible and harmonious with international developments and challenges. All banks must take these principles into consideration:
9 - 1 Management Principles and Directives:
Principle One: The Board of Directors shall exercise direct supervision over the application of the ESG governance concept at the bank and continuously follow up on the steps taken, possessing the necessary knowledge tools to enable it to perform its role optimally, and supervising the distribution of tasks, roles, and responsibilities within the organizational structure of executive and supervisory management.
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Principle Two: The Board of Directors shall exercise direct supervision over taking necessary measures to assess and manage potential financial risks related to climate change (Climate-related financial risks) on the bank's activities and operations, and this shall be reflected within policies, work guides, internal procedures, and the distribution of responsibilities within the organizational structure.
Principle Three: The ESG governance concept and material risks related to climate change shall be incorporated into the bank's general policies, strategic plan, executive plan, and business model to ensure quality executive and supervisory management.
Principle Four: ESG governance risks and financial and material risks related to climate change shall be integrated into executive and supervisory policies and procedures, and the general risk management framework shall be updated to include the role of all three lines of defense, to ensure the identification, assessment, and effective, comprehensive, and sound performance of mitigating financial and material risks related to climate change and ESG governance.
Principle Five: Periodic assessments shall be provided that identify, state, and assess financial risks related to climate change and ESG governance risks, through internal self-assessment of capital adequacy (ICAAP) and liquidity, conducting specific stress tests related to this aspect.
Principle Six: Consider updating the reporting policy, ensuring the availability of databases and effective, efficient internal reporting systems capable of monitoring financial and material risks related to climate change and ESG governance, and that information reaches decision-makers in senior management, headed by the Board of Directors, in a timely manner to make appropriate decisions at the right time.
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Principle Seven: Consider and understand the impact of material risk factors related to climate change and ESG governance risks on the credit, financing, or investment portfolio, and emphasize the necessity of updating the bank's policies, systems, work guides, and credit/financing/investment grant conditions, making this a key part of the credit assessment and feasibility study processes for any credit or investment file.
Principle Eight: To enhance the principle of transparency and disclosure, it is required to consider providing periodic annual reports at a minimum, aimed at delivering necessary information to key stakeholders, according to a specified framework following a single reporting methodology from any of the global initiatives in this regard, provided the methodology is issued by an independent, non-profit organization, and receives Central Bank approval before the bank adopts it.
9 - 2 Guiding Principles:
- Investment in human capital and knowledge management, intensifying specialized and awareness courses for responsible officials, specialized employees, and relevant parties to raise awareness, enhance human capabilities and intellectual capital, and build a solid knowledge base for the bank.
- Continuous awareness and training for the three lines of defense, and enhancing intellectual capital to enable the bank to manage its resources according to the ESG governance concept in the best possible manner, and to acquire genuine knowledge of climate change risks.
- Continuous awareness of customers across all categories, and continuous support for transitioning to a sustainable development culture and working within it, and awareness of its risks, climate change risks, and greenwashing.
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- Amend the fee and commission schedule to provide benefits and incentives to enhance the application of the ESG governance concept.
- Raise awareness of climate change risks and their impact on granted and targeted credit, bank assets, pledged or targeted collateral, and the bank's future activity, the banking sector, and the national economy in general, and encourage and motivate environmentally friendly projects.
- Update procurement policies and contracting with suppliers and supply chains to consider and include sustainability criteria, granting priority in contracting to companies that meet sustainability application criteria.
- Consider environmentally friendly architectural design, whether purchasing properties or improving the bank's current properties, so that they consider lower energy and water consumption, and improve waste management, especially hazardous waste.
- Measure the environmental impact of the bank's internal operations, most importantly measuring the carbon footprint, and stating the volume of emissions and the carbon impact resulting from daily activities.
- Provide an annual sustainability report according to the ESG governance approach, published on the bank's official website and approved media channels, in compliance with the principle of disclosure and transparency.
- Increase financial inclusion rates, and ensure that all banking products and services reach all societal segments and are not limited to certain categories, most importantly including low-income and impoverished categories, micro, small, and medium enterprises, and all geographical areas, especially rural and remote areas.
- Update the bank's plans to include consumer protection, and create appropriate and rapid mechanisms for handling customer complaints, and disseminate financial and banking education and awareness to all customer categories continuously.
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- Continuous awareness of the three lines of defense on how to exercise due diligence regarding so-called "Greenwashing," to protect the bank's assets and protect society as a whole from any improper or non-compliant practices.
- Work on adopting best practices for managing the bank's resources and internal operational systems, so that paper dependency is gradually reduced, and efforts are made to utilize paper waste through recycling and supporting local industries specialized in this aspect.
- Consult the Ministry of Environment or specialized consultants as much as possible, and as needed, to assist in credit assessment and environmental assessment of daily activities to ensure compatibility with international environmental standards.
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10 - Appendices:
1-10 - Important Reference Titles:
The following are important titles for review, reference, and guidance due to their importance to the bank and the team, including, but not limited to:
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Basel Committee on Banking Supervision - Principles for Effective Management and Supervision of Climate-Related Financial Risks. www.bis.org/bcbs/publ/d532.htm
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Basel Committee on Banking Supervision - Climate-Related Financial Risks - Measurement Methodologies. www.bis.org/bcbs/publ/d518.htm
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Arab Monetary Fund - Study on Islamic Banks and Sustainable Development Goals in the Arab World. www.amf.org.ae
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Climate Bonds Initiative. www.climatebonds.net
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Network for Greening the Financial System. www.ngfs.net
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Net-Zero Banking Alliance. www.unepfi.org/net-zero-banking
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Alliance for Financial Inclusion. www.afi-global.org
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Center for Financial Inclusion. www.centerforfinancialinclusion.org
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UN Principles for Responsible Banking. www.unepfi.org/banking/bankingprinciples
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Sustainable Development Atlas issued by the World Bank. www.datatopics.worldbank.org/sdgatlas?lang=en
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2-10 - Requirements Checklist:
The attached list is for reference and can be updated by the bank as deemed appropriate for implementation after conducting a gap analysis or a