Association column: An action plan for sustainability

The Central Bank of Ireland is cracking down on the labelling and marketing of ‘green’ and ‘sustainable’ financial products.

Irish investment funds face increasing regulatory pressure to meet sustainable criteria and ensure their products are not mislabelled. With the pace of climate change increasing, the speed of transition to meet net-zero emissions has taken on greater significance. As a result, the Central Bank of Ireland (CBI) is advising securities market participants to reduce capital investment in carbon-intensive activities and increase investment in products meeting sustainable criteria per the EU Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation.

Investment funds

Investment funds labelled ‘green’, ‘ESG’ or ‘sustainable’ are of particular importance in Ireland, given the scale of the Irish funds sector and the number of Irish funds required to be categorised as Article 6, 8 or 9 under SFDR. Compliance with the requirements of SFDR is essential, notes the Central Bank of Ireland’s ‘Securities Markets Risk Outlook Report’, emphasising that informed investors have high expectations of asset management firms and funds regarding the veracity of their sustainable credentials.

At the end of 2022, Irish investment funds had assets under management totalling approximately €4.18 trillion. New regulatory developments and guidance, along with increased investor demand, are driving the integration of ESG factors into fund managers’ investment considerations. The SFDR and Taxonomy Regulation impose new sustainable disclosure requirements on both manufacturers of financial products and financial advisers.

The SFDR Level II obligations became applicable in January 2023 and require more detailed disclosures to be included in mandatory templates as part of an investment fund’s pre-contractual documentation.

Fund management companies (FMCs) must integrate sustainability risks into the management of their funds, their conflicts of interest procedures and risk management processes. The European Securities and Markets Authority (Esma) has made ESG disclosures a union strategic supervisory priority (USSP) for 2023 and beyond.

Green bonds

Promoting transparency and tackling greenwashing is one of Esma’s priorities in sustainable finance. In 2023, this work will include the coordination of a common supervisory action (CSA) on sustainability. Importantly, the Irish green bond market is small but growing, with Irish residents holding €28.8 billion of green bonds at the end of Q3 2022, compared to €17.1 billion in December 2020.

As this market grows in tandem with investor demand, the risk of mis-selling also grows, as mentioned in the report. In the absence of harmonised EU standards, the CBI seeks disclosures pertaining to (1) the sustainability and green frameworks of issuers; and (2) the management of proceeds. Furthermore, it’s seeking second-party opinions to mitigate the risk of greenwashing. The CBI will also challenge issuers to include appropriate disclosures pending the EU Green Bond Standard (EUGBS) application and on an ongoing basis for securities for which no harmonised EU standard exists.

The EUGBS is a proposed regulation aiming to tackle the regulatory gap for green bonds by setting a clear standard for identifying green assets/projects and a regulatory framework for issuers and external reviewers. It will act as a gold standard for green bonds that can be used by issuers and trusted by investors. Moreover, issuers will voluntarily use it once it enters into force.

The CBI’s emphasis on ensuring the veracity of sustainable investment products reflects the global push towards combating climate change and transitioning to a low-carbon economy. By holding asset management firms and fund managers accountable to high standards and promoting transparency in the green bond market, it is taking an important step towards creating a more sustainable financial system in Ireland.

© 2023 funds europe

HAVE YOU READ?

THOUGHT LEADERSHIP

The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
FIND OUT MORE
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…
DOWNLOAD NOW

CLOUD DATA PLATFORMS

Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.
READ MORE

PRIVATE MARKETS FUND ADMIN REPORT

Private_Markets_Fund_Admin_Report

LATEST PODCAST