1 Setting the Scene – Sources and Overview
1.1 What are the main substantive ESG-related regulations?
The main substantive environmental, social and governance ("ESG")-related regulations are:
- The Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) ("SFDR") (including the regulatory technical standards).
- The Taxonomy Regulation (Regulation (EU) 2020/852).
- Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing the SFDR.
- Five Commission Delegated Regulations and Commission Delegated Directives integrating sustainability issues and considerations into the following EU legislative regimes, i.e.: (1) the Undertakings for Collective Investment in Transferable Securities ("UCITS") Directive 2009/65/EC, amended by Commission Delegated Directive (EU) 2021/1270; (2) the Alternative Investment Fund Managers Directive ("AIFMD") 2011/61/EU, amended by Commission Delegated Regulation (EU) 2021/1255; (3) the Markets in Financial Instruments Directive ("MiFID II") 2014/65/EU, amended by Commission Delegated Regulation (EU) 2021/1253 and Commission Delegated Directive (EU) 2021/1269; (4) Solvency II Directive 2009/138/EC, amended by Commission Delegated Regulation (EU) 2021/1256; and (5) Insurance Distribution Directive EU/2016/97, amended by Commission Delegated Regulation (EU) 2021/1257.
- The Low Carbon Benchmark Regulation (Regulation (EU) 2019/2089).
- The European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017 as amended, which transposed into Irish law the Non-Financial Reporting Directive (Directive 2014/95/EU).
1.2 What are the main ESG disclosure regulations?
The main ESG disclosure regulations are: (i) the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) (including the regulatory technical standards); (ii) the Taxonomy Regulation (Regulation (EU) 2020/852); and (iii) the Low Carbon Benchmark Regulation (Regulation (EU) 2019/2089).
1.3 What voluntary ESG disclosures, beyond those required by law or regulation, are customary?
The voluntary regimes currently in existence with respect to ESG include the Global Reporting Initiative, the Financial Stability Board's Task Force on Climate-related Financial Disclosures and the International Sustainability Standards Board ("ISSB") (which consolidates the Climate Disclosures Standards Board, the Sustainability Accounting Standards Board and Integrated Reporting).
In addition, certain ESG-related regulations have introduced voluntary disclosures; for example, the Low Carbon Benchmark Regulation has introduced two new categories of low-carbon benchmarks, namely: (i) a climate-transition benchmark; and (ii) a specialised benchmark that brings investment portfolios in line with the Paris Climate Agreement regarding the goal to limit the global temperature increase. The categories are voluntary labels designed to assist investors who are looking to adopt a climate-conscious investment strategy
1.4 Are there significant laws or regulations currently in the proposal process?
In addition to the ESG disclosure regulations noted above, there are several other legislative proposals in various stages of the EU's legislative process, including the EU Corporate Sustainability Due Diligence Directive, which aims to address human rights and environmental rights impacts in global value chains and foster responsible corporate behaviour, the EU Green Bond Standard (the "EU GBS"), the EU Ecolabel, and guidelines on credit ratings and loan origination and monitoring.
1.5 What significant private sector initiatives relating to ESG are there?
The prominent private sector initiative is the Sustainable and Responsible Investment Forum ("SIF Ireland") established by Sustainable Finance Ireland. SIF Ireland is a national platform to advance responsible investment practices across all asset classes. It aims to raise awareness of responsible investment nationally and bring together policymakers, asset owners, asset managers and other investment intermediaries to stimulate and advance the growth of responsible investment practices in Ireland. SIF Ireland also aims to grow the market by increasing understanding, acceptance and demand for sustainable investments
standing, acceptance and demand for sustainable investments. The Industrial Development Authority (the "IDA") is also working with financial sector associations on the promotion of Ireland as a location for sustainable finance and environmental sustainability, and is partnering with multinational corporations on green economy initiatives and opportunities. These initiatives and partnerships are a key pillar of the IDA's strategy, "Driving Recovery and Sustainable Growth 2021–2024". The Banking and Payments Federation Ireland has also endorsed the UN Principles for Responsible Banking
In addition, the Irish Funds industry initiative "The Green Team Network" aims to provide a central forum to facilitate knowledge sharing and collaboration in the field of sustainability across the industry.
2 Principal Sources of ESG Pressure
2.1 What are the views and perspectives of investors and asset managers toward ESG, and how do they exert influence in support of those views?
Investors are increasingly looking to align their investment decisions with their personal priorities, focusing now not only on financial returns, but also on non-financial outcomes. Investors are seeking to invest in companies that have the capabilities to both achieve and maintain strong financial and ESG performance. Asset managers are embracing ESG in order to align stakeholders' interests and avoid short-term investments and results in return for long-term incentives aligning investment practices with social responsibilities and principles in order to meet investor demands. Investors are also recognising the potential for ESG factors to affect the valuation and performance of companies they invest in, and this has resulted in investors pressuring companies to increase the amount of information disclosed to investors on ESG-related matters.
2.2 What are the views of other stakeholders toward ESG, and how do they exert influence in support of those views?
ESG and sustainable finance is an area that is continuously evolving and growing to meet the expectations of a wide number of stakeholders, including shareholders, policymakers, regulators and central banks. Within the EU and Ireland, new regulatory frameworks are being introduced to address and support the European Commission's revised Action Plan on Sustainable Finance and the Renewed Sustainable Finance Strategy. This includes a number of regulations outlined above, including the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation, the Low Carbon Benchmark Regulation and the supporting secondary legislation with regard to the implementation of delegated acts.
There are also a number of matters in progress, including the development of the EU GBS, the EU Ecolabel for financial products and updating corporate financial reporting under the Corporate Sustainability Reporting Directive. This is in addition to the European Green Deal, the European Commission's plan to make the EU's economy sustainable, which sets out an action plan to boost the efficient use of resources by moving to a clean, circular economy, restoring biodiversity and cutting pollution with the aim of the EU being climate neutral in 2050. This is in alignment with the European Climate Law, which turns the political commitment into a legal obligation.
Furthermore, shareholders have placed increasing pressure on companies with respect to social and governance issues, including gender and racial diversity on boards, requiring companies to adopt policies and enhanced disclosure with respect to ESG matters.
2.3 What are the principal regulators with respect to ESG issues, and what issues are being pressed by those regulators?
The principal financial regulator in Ireland is the Central Bank of Ireland. The Office of the Director of Corporate Enforcement (the "ODCE"), whose mission it is to improve the compliance environment for corporate activity in the Irish economy by encouraging adherence to the requirements of the Companies Acts and bring to account those who disregard the law, is also a key regulatory body in addition to the Irish Auditing and Accounting Supervisory Authority. More broadly within the EU, the principal regulators with respect to ESG issues are bodies such as the European Commission, the European Securities and Markets Authority ("ESMA"), the European Banking Authority, the European Insurance and Occupational Pensions Authority (the Joint Committee of the European Supervisory Authorities) and the Technical Expert Group (the "TEG").
The key issues being pressed by these bodies are covered in the action plan on financing sustainable growth, which includes: (i) developing an EU classification system for environmentally sustainable economic activities; (ii) developing EU standards (such as the EU GBS) and labels for sustainable financial products (via Ecolabel) to protect the integrity and trust of the sustainable finance market; (iii) fostering investment in sustainable projects; (iv) incorporating sustainability in financial advice; (v) developing sustainability benchmarks; (vi) sustainability in research and ratings; (vii) disclosures by financial market participants; and (viii) sustainability in prudential requirements, strengthening sustainability disclosures by corporates and fostering sustainable corporate governance and promoting long-termism.
2.4 Have there been material enforcement actions with respect to ESG issues?
At the broader European level, there have been a number of material enforcement actions with respect to ESG issues regarding issuers whose securities are admitted to trading on a regulated market. Investors are also increasingly demanding reliable and relevant disclosure on ESG factors. ESMA, the EU securities markets regulator, published its 2021 annual report on 30 March 2022 on corporate reporting enforcement. The report presents the 2021 activities of ESMA and of European accounting enforcers when examining compliance of financial and non-financial statements provided by European issuers. In light of the increased importance of companies' ESG disclosures, European enforcers continued their enforcement activities on non-financial information in 2021, leading to examinations of 711 non-financial statements or 36% of the total number of issuers required to publish a non-financial statement. Related enforcement actions taken by ESMA represented an action rate of 10%
In Ireland under the Transparency Directive (Directive 2004/109/EC) and the Accounting Directive (Directive 2013/34/ EU), the Irish Auditing and Accounting Supervisory Authority does not have powers relating to non-financial statements. Rather, the implementing legislation in Ireland (S.I. No. 360/2017) in respect of Article 19a (non-financial statement) and Article 29a (consolidated non-financial statement) of the Accounting Directive, which introduced the requirement for certain issuers with more than 500 employees to publish non-financial information, designates the Corporate Enforcement Authority (the "CEA") as having such powers of enforcement, including the power to prosecute suspected offences under the legislation. To date, there have been no reported enforcement actions by the CEA in this regard.
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Originally Published by ICLG
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