Irish funds await Central Bank’s response to EU sustainable finance guidance

Áine Ní Riain, asset management and investment funds expert at Pinsent Masons, said that, while there were “no major surprises” in ESMA’s supervisory briefing (16 pages / 312KB PDF) for national competent authorities (NCAs) across the EU, it would still be “interesting to see how soon we will see changes in the Central Bank’s approach to evaluating disclosures for funds and their managers.”

ESMA said the briefing would ensure convergence across EU in the implementation of the Sustainable Finance Disclosure Regulation (SFDR), and in combating greenwashing by investment funds. It includes guidance on how to supervise fund documentation and marketing material, as well as the guiding principles on the use of sustainability-related terms in funds’ names. The briefing also contains guidance for convergent supervision of the integration of sustainability risks by ‘alternative investment fund managers’ (AIFMs) and ‘undertakings for the collective investment in transferable securities’ (UCITS) managers.

In order to verify funds’ compliance with pre-contractual disclosures in the SFDR, ESMA said NCAs should verify that a prominent sustainability information statement is included in the main body of each prospectus and that the pre-contractual templates have been properly and fully completed. ESMA suggests that regulators create checklists to assist with the assessment of compliance with the requirements that pre-contractual disclosures including, amongst other things, to cover a description of how sustainability risks have been integrated into investment decisions, as well as details of the environmental and social characteristics promoted by funds, the good governance practices of investee companies, taxonomy alignment disclosures and the strategy they use to attain their objectives.

ESMA said NCAs should use a risk-based approach to verify the consistency of information in funds’ documentation and marketing material, with consistent sustainability-related disclosures being made across all documents. According to the briefing, NCAs can challenge a fund’s name, and the use of terms such as “ethical”, “green”, and “sustainable”, if it is perceived as misleading when compared to the actual investment objectives and strategy that the fund deploys. A fund must also provide a sustainable investment policy and/or objectives in its documentation and the fund should be managed according to it. The sustainable objectives or characteristics should be clearly identified, ESMA said, and funds must avoid using expressions like “the fund pursues ESG objectives in general” without any further specification.

Ní Riain said: “ESMA’s recommendations for the use of words such as ‘sustainable’ or ‘impact’ in the names of funds is noteworthy. It makes complete sense to implement some restrictions around the names in the interests of being fair, clear and not misleading but the recommendations go beyond the requirements of the SFDR and, as they aren’t entirely clear, could use some further clarification to avoid any divergent interpretation.”

“ESMA suggests restricting the terms ‘sustainable’ and ‘sustainability’ to Article 9 and Article 8 funds that contribute to an environmental or social objective as well as funds disclosing under Article 5 of the Taxonomy Regulation. Where, for example, an Article 8 fund contributes to a social objective, it would not disclose under Article 5 of the Taxonomy Regulation but it may still be making sustainable investments, within the meaning of the SFDR. It seems that the ESMA does not intend to preclude such funds from using the term ‘sustainable’ in their names, but their guidance in this area could benefit from some additional clarification,” Ní Riain added.

To combat greenwashing, the ESMA said NCAs could take enforcement measures in various situations, including when legally required SFDR disclosures have not been made at all after the application of the new rules, and when SFDR disclosures are viewed as “severely misleading”. The briefing cited other examples of when enforcement could be taken, such as when the periodic disclosure of a financial product disclosing under Article 8 or 9 of the SFDR does not match - or fulfil - the characteristics or objectives shown in the fund documentation.

Ní Riain said: “Overall, it would seem likely that an update to the Central Bank’s forms for AIFs and UCITS will be forthcoming in light of these suggestions. While the presentation of sustainability disclosures for Article 8 and 9 funds in an annex to fund supplements is a requirement of the RTS, which doesn’t become applicable until 1 January 2023, most Irish Article 8 and Article 9 funds, particularly new funds, have already had regard to the RTS in updating their documents and so already include their disclosures in annexes.”

“However, ESMA has already invited NCAs in the briefing to include requirements specific to the annexes in their checklists for such funds. It isn’t entirely clear if they expect for these to be included ahead of the RTS application date. How the Central Bank will manage marketing material reviews for consistency with the pre-contractual disclosures is yet to be known. The same can be said of their verifying that website disclosures of fund managers are in line with the requirements of the SFDR,” Ní Riain said.

She added: “Overall, the update should be welcomed, as should any move towards universal regulatory interpretation in this seemingly ever-changing landscape. We look forward to receipt of further guidance from the Central Bank in respect of their supervisory expectations in light of these updates.”