1 Legal and enforcement framework
1.1 What regulatory regimes and codes of practice primarily govern environmental, social and governance (ESG) regulation and implementation in your jurisdiction?
Please note that throughout this Q&A, the law is stated as of 1 August 2022.
ESG regulation and implementation in Ireland are primarily governed by the EU ESG framework, including:
- the EU Non-Financial Reporting Directive (2014/95/EU) (NFRD);
- the EU Sustainable Finance Disclosures Regulation (2019/2088) (SFDR);
- the EU Taxonomy Regulation (2020/852) and the EU Taxonomy Climate Delegated Act (2021/2139), which set out technical screening criteria for climate change mitigation and climate change adaptation; and
- the EU Low Carbon Benchmark Regulation (2019/2089).
EU delegated regulations incorporating sustainability considerations into the Second Markets in Financial Instruments Directive (MiFID II), the Alternative Investment Fund Managers Directive, the Insurance Distribution Directive and the Solvency II Directive will have direct effect in Ireland from 1 August 2022. Irish transposing legislation is awaited for the EU delegated directive incorporating sustainability considerations into the Undertakings for Collective Investment in Transferable Securities Directive. Irish transposing legislation (the European Union (Markets in Financial Instruments) (Amendment) (No. 3) Regulations 2022) has been published in respect of the EU delegated directive which will integrate sustainability considerations into MiFID II's product governance rules from 22 November 2022.
The non-binding recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are relevant across the board.
For companies with an equity listing on Euronext Dublin, the recommendations regarding appointment and succession plans in the UK Corporate Governance Code also apply.
A number of impending EU developments will also impact on Ireland's ESG framework, including:
- a delegated act specifying the technical screening criteria in relation to the four remaining environmental objectives under the EU Taxonomy Regulation (water and marine resources; the circular economy; pollution prevention and control; and biodiversity and ecosystems) (expected to be published later this year and to apply from 1 January 2023);
- a delegated act including specific nuclear and gas energy activities in the list of economic activities covered by the EU Taxonomy Regulation will apply from 1 January 2023 (for more information, see here);
- the proposed Corporate Sustainability Reporting Directive (CSRD) (for more information, see here and here);
- the proposed Directive on Corporate Sustainability Due Diligence (CSDD) (for more information, see here);
- the proposed Regulation for an EU Green Bond Standard (EUGBS) (for more information, see here and here);
- the proposed Directive for Gender Balance on Corporate Boards (for more information, see here and here);
- proposed changes to the EU Securitisation Regulation regarding ESG-related disclosures by originators (for more information, see here); and
- initiatives in relation to ESG ratings, following the April 2022 Consultation by the European Commission.
From a finance perspective, the European Commission also signposted, as part of its July 2021 Sustainable Finance Strategy, that it is considering:
- a general framework for labels for financial instruments;
- work on other bond labels (in addition to the EUGBS), such as transition or sustainability-linked bonds;
- an ESG benchmark label; and
- targeted prospectus disclosures.
The EU Platform on Sustainable Finance has also published its report on a possible social taxonomy (for more information, see here).
From a climate perspective, the European Climate Law (2021/1119) applies. Ireland's climate governance framework was expanded in 2021 by the Climate Action and Low Carbon Development (Amendment) Act 2021 (Irish Climate Act), which:
- commits Ireland to carbon neutrality by 2050;
- requires that carbon budgets up to 2030 provide for a reduction in greenhouse gas (GHG) emissions of 51% by the end of 2030 as against 2018 levels; and
- requires the formulation by the Irish government of:
- three consecutive five-year carbon budgets;
- sectoral emissions ceilings;
- an annually updated climate action plan;
- five yearly long-term climate action strategies;
- five yearly national adaptation frameworks; and
- sectoral adaption plans.
1.2 Is the ESG framework in your jurisdiction primarily based on hard (mandatory) law and regulation or soft (eg, ‘comply or explain') codes of governance?
NFRD: The current reporting regime under the NFRD as implemented in Ireland is mandatory for in-scope companies. While the disclosure obligation in relation to a company's ‘policies' is expressed to be on a ‘comply or explain' basis, the other obligations are not. Reporting companies currently have the option to refer to guidelines and frameworks to make their non-financial disclosures under the NFRD – the European Commission has published non-binding Guidelines for Non-Financial Reporting (2017) and non-binding Guidelines on Reporting Climate-Related Information (2019) which encourage companies to refer to the TCFD recommendations and integrate the TCFD recommendations by reference to the NFRD.
To date, compliance with the TCFD recommendations has been on a voluntary basis for Irish companies. However, the UK Financial Conduct Authority has introduced climate-related financial disclosures in line with the TCFD for premium and standard listed companies, including Irish incorporated companies with either listing.
SFDR: This has had direct effect in Ireland since 10 March 2021 (for more information, see here). Disclosure obligations under the EU Taxonomy Regulation for Article 8 and Article 9 SFDR products have applied since 1 January 2022. The application date for the recently-published Commission Delegated Regulation (EU) 2022/1288 (the Level 2 Regulatory Technical Standards under the SFDR) is 1 January 2023. Some aspects of the SFDR's mandatory requirements – for example, the reporting of principal adverse impacts – are on a ‘comply or explain' basis, but only where an entity has fewer than 500 employees.
EU Taxonomy Regulation: This is directly effective in Ireland and mandatory for in-scope entities. The EU Taxonomy Climate Delegated Act (2021/2139), which sets out technical screening criteria for climate change mitigation and climate change adaptation, has also applied since January 2022. The Commission Delegated Regulation (2021/2178) supplementing Article 8 of the EU Taxonomy Regulation (Article 8 Delegated Act), which requires additional disclosures from companies in scope of the non-financial reporting framework (currently under the NFRD and, in future, under the proposed CSRD) has applied on a phased basis since 1 January 2022. From 1 January 2022 (in respect of financial year 2021), companies must report on the taxonomy eligibility of their activities with respect to climate change adaptation and mitigation. More detailed reporting requirements will apply from 1 January 2023 (in respect of financial year 2022) (for more information, see here).
Climate: Under the EU legal framework for GHG emissions reduction, Ireland must purchase allowances from other member states or buy international credits if it does not meet its emissions reduction targets under the EU Effort Sharing Regulation (2018/842). Private entities to which the EU Emissions Trading System Directive (2003/87/EC) applies are bound to comply with the EU emissions reduction cap and trade regime.
Domestically, the Irish Climate Act obliges all government ministers, insofar as practicable, to:
- perform their functions in a manner consistent with the carbon budget; and
- in the performance of their functions, comply with the sector emissions ceiling for the sector for which they have responsibility.
The Irish Climate Act also requires relevant ministers to attend the Oireachtas (the Irish Parliament) Committee on Climate Action to give an account of progress (including in relation to compliance with a sectoral emissions ceilings). That committee may make recommendations, to which the minister must respond. While the implementation of this arrangement is only beginning (the first carbon budget having been approved in Ireland in May 2022), it might be speculated that it is primarily for the electorate to penalise poor progress.
1.3 Which bodies are responsible for implementing and enforcing the rules and codes that make up the ESG framework? What powers do they have?
The Corporate Enforcement Authority has responsibility for enforcement, including investigation and prosecution of offences (eg, failure to comply with the reporting obligations).
Under the proposed CSRD, in-scope companies will report in accordance with mandatory EU sustainability reporting standards (ESRS) and external assurance (audit) of sustainability information will be required.
Under the CSDD proposal, member states, including Ireland, will be required to designate one or more supervisory authorities which will have powers of enforcement in relation to the obligations imposed.
From a financial services perspective, the management of climate and ESG risks is high on the supervisory agenda of the Central Bank of Ireland, which wrote to regulated financial services providers (RFSPs) in November 2021 (for more information, see here) setting out its supervisory expectations in that space. Addressing exposure to climate-related and environmental risks is a key priority for the Banking Supervision section of the European Central Bank (ECB). In its recent report following its supervisory assessment of institutions' disclosures in respect of those risks, the ECB expressed disappointment that only marginal progress had been made, and noted a significant disconnect between banks' perception of the importance of these risks and what banks disclose to the public (for further information, see here). The ECB is expected to be given supervisory oversight of banks' climate transition plans in the near future. The European Supervisory Authorities (the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) are also focused on ESG, working closely with EU and domestic lawmakers and competent authorities to develop rules on disclosures and reporting, and to prevent ‘greenwashing' risk.
Domestically, from a climate action perspective, while there is a ‘whole of government' approach to climate action and emissions reduction, the Department for Environment, Climate and Communications has a leading role to play in this regard. Relevant regulatory authorities include:
- the Commission for Regulation of Utilities, which has a key role in implementing energy market rules required to support energy system transition; and
- the Environment Protection Agency.
1.4 What is the regulators' general approach to ESG and the enforcement of the ESG framework in your jurisdiction?
Climate: The Irish government announced a target of reaching carbon neutrality by 2050 in advance of the European Union's similar announcement and is supportive of EU climate policy. Ireland's Climate Action Plan commits to reducing emissions by 51% by 2030 as compared to 2018 levels (although it is unclear precisely how this aligns with the EU ambition of reducing emissions by at least 55% by 2030 as compared to 1990 levels). As in many jurisdictions, the main challenges in this area are:
- matching the pace of planning and permitting;
- grid development; and
- changing market systems to the scale and speed of project delivery required.
Finance: In its Ireland for Finance Action Plan 2022 (the fourth action plan under its Ireland for Finance strategy), the Irish Department of Finance reiterated that the "transition to a low carbon economy requires significant investment domestically, regionally, and internationally, and the international financial services sector has an indispensable role in unlocking and facilitating such investments".
Financial regulation: Key focus areas for the Central Bank, set out in its latest multi-year Strategy published in November 2021, include strengthening the resilience of the financial system to climate-related risks and supporting the transition to a low-carbon economy. The Central Bank's supervisory approach to ESG is informed by, and aligned with, developments at EU level. It was a party to the Glasgow Declaration by the Network for Greening the Financial System at COP26.
The Central Bank wrote to RFSPs in November 2021 (for more information, see here) setting out its supervisory expectations regarding the management of climate and ESG risks, with a focus on five key themes:
- risk management frameworks;
- scenario analysis and stress testing;
- strategy and business model risk; and
- disclosures (in particular, the importance of avoiding ‘greenwashing').
It has also conducted spot checks on fund managers' SFDR/EU Taxonomy Regulation-related disclosures, with a wider thematic inspection of SFDR compliance planned in 2022.
The Central Bank established a dedicated Climate Change Unit in 2021, and set up a Climate Risk and Sustainable Finance Forum which met for the first time in June 2022, bringing together the Central Bank, representative industry bodies, RFSPs and experts on climate change to progress the financial sector's response to the risks and opportunities presented by climate change. The Central Bank has also launched its Sustainable Investment Charter, setting out how it plans to embed climate change and sustainability considerations into its own operations.
From a financial services governance perspective, the Central Bank is very focused on culture, conduct and accountability. A new individual accountability framework for RFSPs is imminent, which will include a new senior executive accountability regime under which certain RFSPs and their senior managers will clearly frame where responsibility and decision making rest within their organisation. New conduct standards setting out the standards of behaviour expected by the Central Bank of RFSPs, their senior management teams and their other staff will also be introduced (for more information, see here).
1.5 What private sector initiatives have been launched in your jurisdiction to complement the ESG framework?
- Balance for Better Business is an independent review group established by the Irish government. It has set targets to achieve better gender balance on the boards and in senior leadership positions of both listed and private Irish companies.
- Sustainable Finance Ireland is a public-private initiative aimed at promoting Ireland as a leading jurisdiction in the sustainable finance space, in a manner aligned with the Irish government's Ireland for Finance strategy. It launched the Sustainable Finance Roadmap in October 2021, setting out a series of measures targeted at establishing Ireland as a leading sustainable finance centre by 2025.
- Green Team Network is a voluntary network established by the Irish Funds Industry Association with the aim of facilitating knowledge sharing and collaboration regarding sustainability goals across companies within the Irish funds industry.
- Several renewable energy industry associations are active in advocating solutions to evolve the energy system in a timely way. The Irish Green Building Council is a non-profit organisation with a range of stakeholders from the entire value chain of the built environment.
2 Scope of application
2.1 Which entities are captured by the rules and codes that make up the principal elements of the ESG framework in your jurisdiction?
Reporting obligations under the Non-Financial Reporting Directive (NFRD) are confined to large ‘public interest entities' with over 500 employees. Under the NFRD as transposed into Irish law, the non-financial reporting obligations apply to large companies with more than 500 employees which are ‘ineligible entities', while additional obligations in relation to diversity reporting apply to large ‘traded companies'. The proposed Corporate Sustainability Reporting Directive (CSRD) will expand the scope of entities to include all large EU companies (regardless of whether or where they are listed) and all companies listed on EU regulated markets (other than listed micro-enterprises).
The UK Corporate Governance Code applies to companies with an equity listing on Euronext Dublin or a premium listing on the London Stock Exchange (LSE).
The disclosure obligations under Article 8 of the EU Taxonomy Regulation apply to companies currently in-scope under the NFRD. Additional companies brought under scope of the CSRD will be required to comply with these reporting obligations (for more information, see here).
Irish incorporated companies with a premium or standard listing on the LSE are required to disclose climate-related financial information in line with the Task Force on Climate-related Financial Disclosures recommendations on a ‘comply or explain' basis.
The proposed Directive on Corporate Sustainability Due Diligence will apply to large EU companies and to non-EU companies with significant EU revenue (irrespective of where they are incorporated or, if relevant, listed).
Financial market participants and financial advisers are within the scope of the Sustainable Finance Disclosures Regulation (SFDR).
2.2 How are entities in your jurisdiction that are not subject to specific rules or codes implementing ESG?
Companies may elect to make voluntary disclosures in addition to, or because they are not or not yet, subject to specific legislation, rules or codes. In particular, companies with overseas listings are responding to investor expectations in their sector – for example, in expectation of the US Securities Exchange Commission's proposed climate-related disclosure regime.
Regarding the EU Taxonomy Regulation, the European Commission has stated that entities are free to provide additional voluntary disclosures where they consider that this is relevant to help investors gain a better understanding of the entity's taxonomy eligibility for the first year of reporting and taxonomy alignment thereafter; but that voluntary disclosures are not part of the mandatory disclosures under Article 8 of the EU Taxonomy Regulation and entities should always explain the reasons for making such disclosures.
2.3 What are the principal ESG issues in your jurisdiction that are either part of the ESG framework or part of the implementation of ESG?
The principal ESG issues are:
- sustainability reporting;
- managing climate change and environmental risks;
- diversity at board level;
- executive remuneration;
- culture and conduct; and
- issues with the availability and consistency of the data required to make the required disclosures under the SFDR.
3 Disclosure and transparency
3.1 What primary disclosure obligations relating to ESG apply in your jurisdiction?
Annual disclosure on non-financial (sustainability) and diversity matters is currently mandatory for Irish companies falling within the scope of the Non-Financial Reporting Directive (NFRD), as transposed in Ireland. The proposed Corporate Sustainability Reporting Directive (CSRD) will further expand these disclosure obligations and will introduce mandatory EU sustainability reporting standards (ESRS) (drafts have recently been published for consultation – for further information, see here) alongside a broadening in scope of the companies that are subject to the regime.
Article 8 of the EU Taxonomy Regulation imposes disclosure obligations on companies that are subject to the NFRD (and, in future, the CSRD) in relation to how and to what extent their activities are associated with environmentally sustainable economic activities.
Compliance with obligations under the proposed Directive on Corporate Sustainability Due Diligence (CSDD) – including in relation to due diligence of adverse human rights and environmental impacts, the adoption of a climate action plan and implications for the company's strategy and business model – will be reported upon. Reporting will take place under the CSRD framework for those companies within the scope of both the CSSD and the CSRD.
Under the Sustainable Finance Disclosures Regulation (SFDR), financial market participants (FMPs) and financial advisers must consider sustainability from a number of perspectives. There are internal considerations for FMPs as policies are developed and disclosure considered in terms of integrating sustainability into investment decisions and ensuring that remuneration policies are consistent with any such integration. FMPs must also consider how their investment decisions impact on sustainability factors and make disclosures on adverse impacts at an entity level. Disclosures are also required from a product perspective in terms of the pre-contractual, website and periodic reporting disclosures and consideration of product-level principal adverse impacts. In addition, EU Taxonomy Regulation-related disclosures apply to those funds/products under Articles 8 and 9 of SFDR that make sustainable investments with environmental objectives in accordance with the EU Taxonomy. This subset of Article 8 and 9 SFDR funds/products (Articles 5 and 6 of the EU Taxonomy Regulation) are subject to additional disclosure requirements regarding the alignment of their investments with the EU Taxonomy Regulation.
3.2 What voluntary ESG disclosures are also commonly made in your jurisdiction?
While climate-related disclosures consistent with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations are required from Irish companies with a standard or premium listing on the London Stock Exchange (see above), the TCFD recommendations remain a non-binding framework for other Irish companies.
Other relevant voluntary disclosure frameworks which are available for use include:
- the GRI Standards developed by the Global Reporting Initiative;
- the SASB Standards, developed by the Sustainability Accounting Standards Board to assist in identifying the ESG issues of most relevance to 77 different industries; and
- the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards being developed by the International Sustainability Standards Board, which are intended to provide a global baseline and to be compatible with jurisdiction-specific requirements.
3.3 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
Under the NFRD as implemented in Ireland, the boards of directors of in-scope companies are responsible for the non-financial statement (included within the directors' report or published as a separate statement) and for large ‘traded companies' the diversity report (included within the corporate governance statement in the annual report). Failure to comply with these obligations is an offence.
While oversight and responsibility primarily sit with the board, senior management may also contribute to the preparation of the necessary disclosures, with the board establishing a governance framework including internal controls.
3.4 What best practices should be considered in relation to ESG reporting and disclosure?
ESG reporting and disclosures must comply with any requirements set out in the relevant legislation.
Boards should consider whether any updates will be required to internal documentation, such as sustainability policies (or consider whether a sustainability policy should be put in place), and how the new reporting requirements will be factored into future annual reporting cycles.
There is an increased focus from shareholders, investors and other stakeholders on ESG matters, coupled with demand for greater transparency, including demand for ESG disclosures that are useful, comparable and reliable.
The current legislative framework does not prescribe standards for ESG disclosures and reporting companies have the option to refer to non-binding guidelines and frameworks under the NFRD (see Q 1.2 ).
Under the CSRD, reporting companies will be required to report in compliance with mandatory ESRS (see Q 1.3, Q 3.1 and Q 4.3).
4 Strategy and governance
4.1 How is ESG strategy typically designed and implemented in companies in your jurisdiction?
As companies assess, monitor and integrate ESG factors into their strategies, business models and organisational culture, boards should be aware of the expectations of shareholders and other stakeholders in relation to ESG and promote investor confidence by establishing accountability mechanisms. How ESG strategy is designed and implemented depends on:
- the nature and scale of the company;
- the industry in which it operates; and
- the profile of its stakeholders.
The key issue for senior management is to:
- identify ESG issues that impact their business and industry;
- put in place a strategy that aligns with and forms part of its business model; and
- develop oversight tools, including key performance indicators (KPIs), to assess progress on goals.
From a risk management perspective, maintaining robust compliance frameworks for assessing and managing ESG risks and controls is important.
Under the proposed Directive on Corporate Sustainability Due Diligence (CSDD), directors of in-scope companies will be responsible for putting in place and overseeing the implementation of due diligence processes and integrating due diligence into the corporate strategy. Larger in-scope companies will be required to adopt a plan to ensure that their business model and strategy is compatible with the transition to a sustainable economy and with limiting global warming to 1.5°C in line with the Paris Agreement.
The proposed Corporate Sustainability Reporting Directive (CSRD) will require the disclosure of a company's strategy and business model as a context for its sustainability reporting in addition to how sustainability matters are related to, interact with, and inform its strategy and business model.
From a financial services governance perspective, the Central Bank of Ireland is very focused on culture, conduct and accountability, with a new individual accountability framework for regulated financial services providers (RFSPs) imminent which will include a new senior executive accountability regime and new conduct standards (for more information, see here). As regards the wider ESG agenda, while the governance codes that apply to specific financial services entities have not yet been updated to address ESG matters, the boards of all Irish RFSPs need to be mindful of the Central Bank's focus – set out in its latest multi-year Strategy published in November 2021 – on strengthening the resilience of the financial system to climate-related risks and supporting the transition to a low-carbon economy (for more information, see here).
4.2 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
Active oversight and implementation of ESG strategy and risk management will remain the primary responsibility of the board. However, depending on the company and the board, some aspects of oversight may be delegated to a board committee or combined with the responsibilities of a key committee. In some instances, a particular director is charged with leading on ESG engagement. Notwithstanding any delegation, it remains important that the entire board is fully briefed on ESG matters in order to fully inform their decision making and impacts.
The proposed CSDD requires that when fulfilling their duty to act in the best interests of the company, directors must take into account sustainability matters including the human rights, climate and environmental consequences of their decision making.
4.3 What mechanisms are typically utilised to monitor the implementation of ESG strategy in your jurisdiction?
Disclosures regarding a company's business model, the policies pursued and principal risks in relation to environmental matters, social and employee matters, respect for human rights and bribery and corruption must be disclosed under the Non-Financial Reporting Directive, as implemented in Ireland. While a company's statutory auditors must establish that the non-financial statement has been prepared, the content of the non-financial statement need not be audited.
The proposed CSRD and accompanying EU sustainability reporting standards (ESRS) are more prescriptive in relation to disclosures regarding the company's strategy, business model and targets in relation to sustainability matters.
In addition, statutory auditors (or other independent assurance providers) will be required to give an opinion on compliance with the requirements of the CSRD and ESRS based, initially at least, on a limited assurance engagement. As such, future disclosures under CSRD are likely to assist in monitoring the implementation of ESG strategy.
Increasingly, proxy advisers are monitoring aspects of ESG strategy and in particular board oversight of same.
4.4 What role is played in this regard by (a) the board and (b) other corporate bodies and/or officers?
Under the proposed CSRD, the sustainability disclosures which are included in the directors' report will be prepared in accordance with the ESRS and subject to limited assurance, as discussed above.
Boards should also take steps in order to better understand shareholder and other stakeholder expectations in relation to ESG. There is increased external pressure on companies to makes ESG disclosures in order to facilitate reporting (whether voluntary or mandatory) by key customers on their value chains.
4.5 How is executive compensation typically aligned with ESG strategy in your jurisdiction?
Companies are coming under increased pressure to link executive compensation to ESG targets.
Under the proposed CSDD, larger in-scope companies must take into account the fulfilment of obligations outlined in relation to their climate action plan when setting variable remuneration where variable remuneration is linked to the contribution of a director to the company's business strategy and long-term interests and sustainability.
The Investment Association has advised issuers to incorporate the management of material ESG risks/opportunities as performance conditions in the company's variable remuneration where the management of these risks is part of the company's long-term strategy. In doing so, they should select ESG metrics that are quantifiable and clearly linked to company strategy, and the rationale for the selected ESG performance metrics and targets should be disclosed to investors.
Institutional Shareholder Services Inc (ISS) has indicated that while it will accept ESG performance conditions in remuneration policies, such targets should be material to the business and quantifiable.
Glass Lewis has noted that when reviewing proposals seeking to tie executive compensation to ESG practices, it will review the target firm's compliance with (or contravention of) applicable laws and regulations, and examine any history of environmentally and socially related concerns, including those resulting in material investigations, lawsuits, fines and settlements. It will also review the firm's current compensation policies and practices.
Financial market participants must include information in their remuneration policies on how their policies are consistent with the integration of sustainability risks and publish this information on their websites.
4.6 What best practices should be considered in relation to the design and implementation of ESG strategy?
Key best practices that should be considered include:
- setting an ESG strategy and implementing related policies and processes that are appropriately resourced by those with suitable skills and qualifications to oversee integration of strategy across the business;
- putting in place appropriate internal structures and controls, including risk management and internal controls to assess ESG risks;
- identifying priority areas based on the outcome of risk assessments;
- evaluating board expertise and competency on ESG and sustainability matters, considering whether a director or board committee should be appointed to lead on ESG issues, and engaging in ongoing training and education;
- assessing current due diligence undertaken, reviewing value chains and data/ metrics available to identify gaps, and conducting procurement and contracting based on ESG principles;
- consulting with stakeholders in relation to risk assessments to check that views are aligned;
- establishing a dedicated function for the collection and collation of data, including from sources outside the business (eg, value chains);
- identifying any gaps in data that may affect the ability to oversee and report on key ESG risks and progress on targets, and identifying steps to improve data quality and availability; and
- measuring and reporting on material KPIs (eg, greenhouse gas emissions, water efficiency).
5.1 What is the general approach of lenders towards ESG in your jurisdiction? What internal and external information regarding a prospective borrower will they typically consider in this regard?
The impact of a greater emphasis on ESG is already apparent in the Irish lending market, with ESG factors increasingly being considered by lenders when determining the availability and cost of capital. Green loans and sustainability-linked loans are becoming increasingly prevalent, and there is a growing social loans market. Those types of loans are generally classified in line with the Loan Market Association's (LMA):
- Green Loan Principles (and related Guidance on the Green Loan Principles);
- Social Loan Principles (and related Guidance on the Social Loan Principles); and
- Sustainability-Linked Loan Principles (and related Guidance on Sustainability-Linked Loan Principles).
With green loans, where the focus is on how the borrower applies the loan proceeds towards ‘green' projects (eg, projects in the area of renewable energy, energy efficiency, prevention and control of pollution, clean transport, climate change adaptation, sustainable water and wastewater management and green buildings), lenders will expect to see details of:
- the borrower's environmental sustainability objectives;
- the process by which the borrower determines whether its projects are ‘green'; and
- the processes that will be used to identify and manage potentially material environmental and social risks associated with the proposed ‘green' project.
They may also wish to validate that information at intervals throughout the term of the loan. It should be borne in mind that not all products labelled as ‘green' will come within the scope of the Green Loan Principles. For instance, ‘green' mortgages offered to retail customers to finance the acquisition of private homes with certain building energy ratings are unlikely to meet the requirements of the Green Loan Principles as to:
- the use of proceeds;
- the process for project evaluation and selection;
- the management of proceeds; and
Sustainability-linked loans (ie, loan instruments and/or contingent facilities which incentivise the borrower's achievement of ambitious, predetermined sustainability performance objectives) are increasing in popularity, and have been used in connection with objectives relating to:
- the use of recycled materials in retail products;
- the energy efficiency of office buildings;
- the gender diversity of workforces; and
- the carbon intensity of production processes.
Pricing mechanisms linked to the borrower's achievement of sustainability performance targets have generally been used to incentivise borrowers to achieve those targets. These mechanisms include the application of pricing ratchets to commitment and/or utilisation fees and to interest margins. This reflects the fact that many sustainability-linked loans are structured as revolving credit facilities for investment grade corporate borrowers which the parties often expect to remain undrawn for much of their tenor. Variations on ‘two-way' margin/fee adjustments are common, with underperformance against the relevant sustainability performance targets resulting in borrowers being required to deposit an amount equal to the higher margin/fee into an account which can only be used for ESG purposes, or to donate to a charitable organisation with an ESG objective. This is intended to ensure that lenders do not benefit financially from borrowers' underperformance against sustainability performance targets.
While the market for social loans (where use of proceeds is, as with green loans, the determining factor) is less developed, it is growing with affordable housing at the forefront of related social projects.
5.2 Are bonds/loans that are marketed as green bonds/loans, social bonds/loans, sustainability bonds/loans or similar a feature of the markets in your jurisdiction?
The position in relation to green, sustainability-linked and social loans is set out in question 5.1.
Regarding green, social, sustainable and sustainability-linked bonds, the green bond market is starting to grow in Ireland. Issuances are generally structured in line with the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines or the Sustainability-Linked Bond Principles, as appropriate, issued by the International Capital Market Association (ICMA).
Recent statistics issued by the Central Bank noted that the "market for green bonds is growing, but is still relatively young and small in size compared to the overall bond market". To date, Irish green bond issuance has been dominated by the Irish sovereign green bond (accounting for 72% of Irish outstanding issuance at the end of 2020). The first Irish company to issue a green bond was ESB in 2019. The first social bond issue by an Irish bank was by AIB in March 2022.
5.3 What key developments have taken place in the structuring of these instruments in your jurisdiction?
There is no Irish-specific framework for green bonds/loans, social bonds/loans, sustainability bonds or sustainability-linked bonds/loans – instead, the principles developed by the LMA (in the case of loans) and the ICMA (in the case of bonds) tend to be used as the starting point. The progress of the proposed Regulation for an EU Green Bond Standard at EU level is being watched closely.
5.4 What best practices should be considered in relation to ESG in the financing context?
Alignment with the principles developed by the LMA (in the case of loans) and the ICMA (in the case of bonds) is regarded as best practice.
6 ESG activism
6.1 What role do institutional investors and other activist shareholders play in shaping ESG in your jurisdiction?
Proxy advisers and institutional investors are increasingly focused on ESG and play a role in monitoring companies' compliance with ESG requirements under legislation, listing rules, the UK Corporate Governance Code and guidance issued by advisory bodies, such as the Investment Association.
Failure to comply with legislative and other guidance (without providing shareholders with a reasonable explanation for non-compliance or presenting a plan for future compliance) may result in proxy advisers issuing negative ratings for specific companies. This in turn can influence the views of institutional investors and other activist shareholders, which may then put pressure on companies to enhance their compliance with ESG requirements going forward.
6.2 How do activist shareholders typically seek to exert influence on corporations in your jurisdiction in relation to ESG?
Shareholders are increasingly trying to align investment decisions with their views on ESG, as they recognise the impact which ESG issues can have on the value of their investment and the performance of the companies they invest in. To this end, they are exerting pressure on companies to improve disclosure in relation to ESG issues. This is complemented by the increase in legislation requiring enhanced disclosures by companies – for example, under the Non-Financial Reporting Directive, the EU Taxonomy Regulation and proposed Corporate Sustainability Reporting Directive.
Shareholder influence in this regard can be most clearly seen by the way in which shareholders exercise their votes at general meetings – for example, by voting against the re-election of directors/committee chairs where they fail to provide explicit disclosure concerning the board's role in overseeing material environmental and social issues or where the company has failed to meet certain targets relating to board diversity. Shareholders can influence executive remuneration as legislation such as the amended Shareholder Rights Directive gives shareholders a ‘say on pay' by entitling them to vote on remuneration policies and reports. Shareholder activism in this regard is aided by proxy advisory firms such as ISS, Glass Lewis, the Investment Association and Institutional Voting Information Service, which each year publish recommendations on how shareholders should vote on specific issues.
6.3 Which areas of ESG are shareholders currently focused on?
Shareholders are particularly focused on adequate ESG oversight by company boards, including expectations of express disclosures of the board's role in overseeing material environmental and social issues.
From a climate perspective, shareholders expect detailed disclosure of:
- climate-related risks;
- appropriate greenhouse gas emissions reduction targets; and
- the production and disclosure of climate transaction plans (to meet the goals of the Paris Agreement).
There is growing focus on diversity and inclusion at board level; and shareholders are increasingly scrutinising companies whose executive remuneration, including pension contributions, is not seen as being aligned with the wider workforce.
6.4 Have there been any high-profile instances of ESG activism in recent years?
Shareholder activism in general in Ireland occurs at a relatively low rate when compared to other jurisdictions such as the United States. As the shareholder base of Irish public companies becomes more diverse and sophisticated, and as the focus on ESG issues becomes more pressing with the increasing volume of regulatory developments in this area, we are likely to see an increase in shareholder activism.
Most recently, the COVID-19 pandemic has led to shareholder dissent on votes relating to executive remuneration where there was a failure to align executive remuneration with that of the wider workforce and where bonuses were paid to executives in companies which received pandemic financial support from the Irish government. Some shareholders have been critical of attempts by companies to restrict access to general meetings on the basis of public health advice.
6.5 Is ESG activism increasing or decreasing in your jurisdiction? How and why?
The increase in the volume of legislation and guidance relating to ESG factors which companies are expected to comply with naturally lends itself to increased focus by institutional investors and activist shareholders on compliance and an increase in ESG activism.
Institutional investors are coming under increased pressure to engage with the companies they invest in and disclose the issues they prioritise for assessing investments, including ESG matters.
The 2017 changes (Directive (EU) 2017/828) to the Shareholder Rights Directive (2007/36/EC) introduced requirements for proxy advisers to publicly disclose information on the preparation of their research, advice and voting recommendations; and for institutional investors to disclose their engagement and voting policies and records and how they monitor investee companies (including in respect of their social and environmental impact).
7 Other stakeholders and rights holders
7.1 What role do stakeholders or rights holders (eg, employees, pensioners, creditors, customers, suppliers, and Indigenous communities) play in shaping ESG in your jurisdiction? What influence can they exert on a company?
From an employment perspective, in a highly competitive jobs market, employees are seeking out employers with a meaningful commitment to the promotion of diversity and inclusion and tackling climate change, which in turn places pressure employers to prioritise taking action in these areas. The Gender Pay Gap Information Act 2021 was introduced in July 2021 (for more information, see here and here). The minister for children, equality, disability, integration and youth announced on 8 March 2022 that regulations to implement these requirements will be published shortly. While a full review of the regulations, once available, will be needed to determine how this will affect companies in practice, the minister indicated that organisations with over 250 employees will have to report on their gender pay gap in 2022. Pay gaps will need to be explained, including steps being taken to eliminate those gaps. Employees will have access to information on the gender pay gaps in these companies, which may have an impact on recruitment and retention in the future.
From an investor perspective, investors have been driving the ESG agenda for some time as they seek more sustainable returns. As a result, there is increasing demand for sustainable products that address not only climate risk, but also longer-term social risks as well as governance issues. Investors can exert influence through appropriate stewardship policies and engagement with their investee companies.
Institutional investors and lenders have shown widespread appetite for ESG-related financial products, with market standard approaches developing in light of the industry-driven principles adopted by the Loan Market Association and the International Capital Market Association. Firms seeking capital investment are increasingly building ESG into business strategies to remain attractive.
From a governance perspective, as mentioned above, culture and conduct remain a regulatory priority, with the impending introduction of an individual accountability framework for regulated financial services providers and their senior managers. Gender equality, diversity and inclusion remain key priorities for stakeholders (for more information on the Central Bank's views in that area, see here). Balance for Better Business has been widely welcomed as a key step towards harnessing and promoting the talent and experience of women across the financial services industry.
In terms of climate litigation, in the 2020 case of Friends of the Irish Environment CLG v Government of Ireland, the Supreme Court struck down the National Mitigation Plan. The court concluded that the plan was ultra vires in that it failed to comply with the statute under which it was made (the Climate Act) because it fell short of the levels of specificity required to provide the transparency needed for citizens to form a view on government policy. This case differed from climate litigation in other jurisdictions following Urgenda, in that it was not decided on the rights pleaded under the European Convention on Human Rights (and the Constitution). However, the court did observe that there may well be cases, environmental in nature, where constitutional rights and obligations are engaged, and where an individual might successfully assert that personal rights had been breached.
8 Trends and predictions
8.1 How would you describe the current ESG landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The ESG landscape continues to develop at pace in Ireland, aligned with the speed of developments at EU level and the growing importance placed on ESG – and in particular, the management of climate risks – by regulators (eg, the Central Bank and the European Central Bank (ECB)) and stakeholders.
A number of EU legislative proposals are expected to progress significantly over the next 12 months.
Ireland is involved in negotiations on the European Commission's ‘Fit for 55' package, proposed in July 2021, which comprises proposals to amend existing legislation as well as new initiatives in climate, energy and fuels, transport, buildings and land use, and forestry (for more information, see here).
The Corporate Sustainability Reporting Directive (CSRD) is expected to be adopted by the European Commission later this year, and reporting obligations will commence on a phased basis from 1 January 2024. The European Financial Reporting Advisory Group is due to submit the first set of draft EU sustainability reporting standards to the European Commission by November 2022. The proposed Directive on Corporate Sustainability Due Diligence will progress through the usual EU legislative process; however, it is not currently anticipated that the directive will be adopted before 2023.
A delegated act specifying the technical screening criteria in relation to the four remaining environmental objectives under the EU Taxonomy Regulation (water and marine resources, circular economy, pollution prevention and control, biodiversity and ecosystems) is expected to be published later this year. Once adopted, this delegated act will apply with effect from 1 January 2023. The European Commission's Complementary Climate Delegated Regulation of 9 March 2022 covering nuclear and fossil gas activities will apply from 1 January 2023. We expect to see further EU-level discussions on an extension of the EU Taxonomy ‘beyond green' and the possible development of a ‘social taxonomy' following recent reports from the Platform on Sustainable Finance (Extended Environmental Taxonomy: Final Report on Taxonomy extension options supporting a sustainable transition (March 2022) and Final Report on Social Taxonomy (February 2022)) (for more information on the proposal to extend the EU Taxonomy ‘beyond green', see here. For more information on the proposals for a ‘social taxonomy', see here).
At the time of writing, the European Parliament has confirmed its negotiating position on the Regulation for an EU Green Bond Standard (EUGBS) and trilogue negotiations are beginning (for more information, see here).
Work is also underway to progress sustainability-related disclosures in the securitisation market (for more information, see here). The European Banking Authority (EBA) has also reviewed how EU regulations on sustainable finance could be applied to securitisations and recently recommended that, instead of establishing a new dedicated framework for green securitisation, the proposed EUGBS regulation should be amended to apply to securitisations (for more information, see here).
We expect transition planning for banks to be a key theme later in 2022, with the ECB expected to be given greater supervisory responsibilities in that area.
Looking further ahead, following the launch by the European Commission of its banking package in October 2021, we expect to see more on its proposals to:
- expand the scope of ESG disclosures to all institutions;
- explicitly empower supervisory authorities to incorporate ESG in the supervisory review and evaluation process and in stress testing; and
- encourage institutions to have robust governance arrangements and concrete plans signed off by the management body to deal with ESG risks.
The European Commission has also asked the EBA to assess whether and how capital requirements could be differentiated depending on the environmental and social impact of the assets held by institutions. The final results of that analysis are not, however, expected until 2023.
In infrastructure and construction projects, we expect the high level of interest from lenders, employers and contractors in using existing, and developing innovative new contractual mechanisms to drive all aspects of ESG principles to continue. For example, stakeholders are continuing to engage with new climate mechanisms drafted by the NEC and the Chancery Lane Project in the United Kingdom.
Domestically, the Circular Economy, Waste Management (Amendment) and Minerals Development (Amendment) Bill 2022, which aims to support Ireland's transition to a more sustainable pattern of production and consumption that will minimise waste with a view to significantly reducing greenhouse gas emissions, is currently going through the legislative process. Other anticipated relevant legislation includes:
- the new individual accountability framework (for more information, see here);
- the Work-Life Balance Bill; and
- the Amendment of the Constitution (Role of Women) Bill.
9 Tips and traps
9.1 What are your top tips for effective ESG implementation in your jurisdiction and what potential sticking points would you highlight?
The lack of global convergence on ESG classification, disclosure regimes and universally agreed reporting standards and principles is likely to be a potential sticking point. As a result, global corporations may find themselves subject to a myriad of regimes on top of the EU sustainability reporting regime, including:
- the US Securities and Exchange Commission's proposed climate-related disclosure regime; and
- the climate disclosures being introduced in the United Kingdom, which are increasingly being aligned with the Task Force on Climate-related Financial Disclosures.
An ESG framework which retains flexibility (to suit the wide range of in-scope sectors and entities) and strives for transparency is essential to drive stakeholder trust and confidence.
Another key sticking point is the lack of reliable and comparable data, making it harder for stakeholders to understand how data is collected and whether it is collected consistently. Without convergent standards, it will be harder for stakeholders to use available data consistently and to make informed decisions. This absence of certainty, at a time when ESG frameworks are expanding rapidly, may inhibit investment in the ESG space and make it challenging for in-scope entities to develop the necessary policies and processes to manage ESG compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.