On 22 October 2024, the Central Bank of Ireland
("Central Bank") held a Sustainable
Finance Disclosure Regulation ("SFDR")
workshop with industry representatives as a follow up to the
workshop it held in November 2023 to address SFDR implementation
issues. This latest workshop addressed outstanding issues since the
previous meeting, the implementation of the European Securiteis and
Markets Authority ("ESMA") Guidelines on
Funds' Names using ESG or Sustainability-related terms (the
"Guidelines") and the outcome of the
common supervisory action ("CSA") on
sustainability.
Following the workshop, Irish Funds shared a note of the meeting
with its members, as a precursor to guidance due to be issued by
the Central Bank in the coming months. The Central Bank has
highlighted that the requirements and expectations set out in the
note should be considered by all funds and taken into account in
new fund applications going forward.
SFDR Implementation Issues
The table below summarises the key points made by the Central
Bank in relation to various SFDR implementation issues discussed at
the workshop.
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Article 8
Exclusion only funds
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- Possible for a fund which implements an exclusion-only strategy
to be categorised as an Article 8 fund, subject to it providing
appropriate disclosures to investors.
- Exclusions applied to be disclosed in detail as "binding
elements" of the investment strategy.
- Disclosures should detail:
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- the exclusions, with a positive disclosure of the environmental
and / or social characteristics which are promoted by the fund as a
result of the application of the exclusion strategy;
- the thresholds applied (expectation on how these thresholds are
disclosed in relation to passive funds is in discussion);
- define what is meant by terms such as "involved in";
and
- if there are ESG scores that result in exclusions, these ESG
scores (and relevant thresholds) should be described.
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Article 8 & 9
Funds Asset allocation for entire portfolio – no exclusion
for cash or derivatives
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- The entire portfolio must be accounted for when calculating the
minimum commitments disclosed in the asset allocation -
calculations based on portfolio holdings excluding cash or
derivatives, for example, is not permitted.
- The Central Bank does not accept disclosures that state, for
example, "100% sustainable except cash".
- ESMA is not supportive of the use of ranges for the asset
allocation.
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Article 8 & 9 Funds
Consideration of minimum proportions
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- The Central Bank expects the minimum commitment figures
disclosed in the pre-contractual annex to be based on normal market
circumstances (ie, disclose a positive minimum commitment figure
instead of referencing a 0% minimum commitment figure).
- Additional disclosures should be included in the fund
supplement and the annex outlining the circumstances (ie,
rules-based market events) where the fund would have 0%
environmental or social aligned investments / have 0% investment in
sustainable investments.
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Article 8 & 9
Funds Taxonomy Disclosures
"What is the sustainable investment objective of this
financial product?"
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- When a fund is not Taxonomy-aligned but makes sustainable
investments, the Central Bank has seen examples of funds not
listing Taxonomy Regulation environmental objectives as per the
requirements in the Annexes.
- Central Bank view is that, where a fund invests in
environmental sustainable investments, it should list the relevant
Taxonomy Regulation environmental objectives. Industry's
concern that this is confusing for investors and not in line with
requirement to be "fair, clear and not misleading".
- Central Bank agreed it is reasonable to include an explainer
that the fund has 0% commitment to Taxonomy-alignment and therefore
does not commit to investments contributing to the environmental
objectives in Article 9 Taxonomy Regulation.
- It was agreed that Irish Funds would draft and share sample
wording with the Central Bank to provide it with the rationale for
the approaches being taken in response to this question.
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Article 8 & 9
Funds Disclosure of minimum sustainable investment
commitment
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- Where possible, the minimum proportion set for sustainable
investments with environmental and social objectives in the box on
first page of SFDR Annex should equal the overall minimum
proportion of sustainable investments set out in the asset
allocation section.
- Where this is not feasible, the fund may disclose the most
representative minimum proportion of sustainable investments with
environmental and social objectives on page 1 provided:
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- the overall minimum proportion of sustainable investments is
high in accordance with the Commission's Q&A; and
- an explanation is included as to why minimum proportions
disclosed on page 1 do not add up to the overall minimum proportion
of sustainable investments disclosed in the asset allocation
section.
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Article 9(3) Funds
Paris-Aligned Benchmark / Climate Transition Benchmark Tracking
Funds
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- The fund (while benefitting from an exemption from disclosing
how the objective is obtained) must disclose the minimum proportion
of sustainable investments and be able to classify the minimum
proportion of sustainable investments in its portfolio either as
having an environmental or social objective.
- The Central Bank advised that it will not approve an Article
9(3) fund that discloses no commitment or a low commitment to
sustainable investments within the meaning of Article 2(17) of the
SFDR, citing the Commission Q&A from July 2021 (stating Article
9 funds are required to invest only in sustainable investments save
for hedging / liquidity instruments).
- It is up to each individual manager to determine whether or not
they can stand over the approach taken to satisfy themselves that
the PAB / CTB tracking fund has been appropriately classified under
the SFDR.
- Article 9(3) funds must substantially invest in sustainable
investments. The Central Bank does not intend to impose a threshold
for determining what is meant by "substantially invest"
for this purpose.
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ESMA's Fund Naming Guidelines
Irish Funds outlined at the workshop that the Central Bank's
recently announced streamlined filing process relating to changes
required to comply with the ESMA Guidelines would only apply to a
very small proportion of impacted funds if the fast-track was
limited to changes to funds' names only. The Central Bank
subsequently updated its process clarification to confirm that the
streamlined process would apply to changes to funds' names and
minor changes to prospectuses, supplements and SFDR Annexes.
Specific concerns were raised in relation to the timing of
exchange traded funds rebalancing, with funds tracking the MSCI
being required to rebalance towards the end of May, after the 21
May 2025 compliance deadline. The Central Bank noted that they were
mindful of the issues for index tracking funds and that some form
of forbearance would be available. Firms should engage with the
Central Bank on bilateral basis in this respect.
Outcome of CSA on Sustainability
ESMA is expected to publish its finding from its CSA on
sustainability in Q1 2025. The Central Bank will follow up with its
own findings in report form rather than in the form of a Dear CEO
letter. A number of risk mitigation programmes will address firm
specific issues identified and requiring action. Direct engagement
with specific firms will take place immediately, rather than
waiting for the ESMA findings to be published.
Next Steps
As noted above, firms should refer to the expectations noted at
the workshop pending the publication of guidance by the Central
Bank next year. There is no fixed timeline for publication.
Industry asked that the timeframe for complying with any
publication that the Central Bank issues could be aligned with the
timeframe for updating documentation to address the revised SFDR
Level 2 measures. The Central Bank noted that, where guidance is
published, the Central Bank's expectation is that managers
implement any changes to the pre-contractual disclosures necessary
to comply with the publication the next time the fund documentation
is being revised for another reason.
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.
