Central Bank of Ireland clarifies sustainability disclosure expectations

The CBI acknowledged that there is a lack of availability and consistency of environmental and social governance (ESG) data but noted that the ESAs require an explicit quantification of the extent to which investments underlying the fund are aligned with the EU’s taxonomy, which the CBI said cannot be ignored. It added that it expected funds to make meaningful disclosure on a ‘best efforts’ basis.

Áine Ní Riain, investment funds expert at Pinsent Masons, said: “The CBI has very helpfully set out its expectations now as to the disclosure under article 5B of the Taxonomy Regulation, that requires in-scope article 8 and article 9 funds to include a description of the extent to which the investments underlying the funds are in economic activities that qualify as environmentally sustainable.”

The ESAs’ updated joint supervisory statement, issued in March, stated that during the interim period before the application of the formal regulatory technical standards (RTS) next year, compliance with article 5 of the Taxonomy Regulation is to be by way of an explicit quantification through the numerical disclosure as a percentage of the extent to which investments underlying the fund are taxonomy-aligned. The ESAs stated that estimates should not be used and, where data isn’t readily available, financial market participants could rely on equivalent information from investee companies or third-party providers.

In December 2021 most funds in Ireland had opted to include to include in their prospectuses and supplements an explanation of why they were not yet able to accurately calculate their percentage taxonomy-alignment in financial disclosure documents.

In response to queries over the regime, the CBI outlined its expectations for in-scope funds that intend to make taxonomy-aligned investments – or where taxonomy alignment forms part of its investment strategy. It said that, since the disclosure indicates that certain investments underlying the funds will contribute to the environmental objectives of climate change mitigation or climate change adaptation, they should provide disclosure on the minimum proportion of investments in economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. This must be included on a ‘best efforts’ basis, it said, to comply with article five of the Taxonomy Regulation, since disclosure of a 0% level does not meet the requirement.

For in-scope article eight and nine funds that do not intend to make taxonomy-aligned investments, the CBI said it did not expect to see taxonomy-aligned disclosure in the relevant supplement – provided that the funds make their intention clear. Funds will be allowed to set out general disclosure that they might have incidental investment in taxonomy-aligned investments.

Ní Riain said it is understood that the CBI will not immediately expect existing funds to update their documents in light of these changes and funds can wait until they are required to update their documents for the level two measures by 1 January 2023. If they open their documents in the interim, however, these new supervisory expectations will need to be factored into their updates.

Ní Riain said: “This taxonomy-alignment assessment is proving difficult for managers to quantify given the current lack of transparency, consistency and availability of data in the market at present and it is welcome to see the CBI taking a pragmatic approach to the requirement for the period until the level two measures take effect. The Bank’s approach towards funds that do not propose to be taxonomy-aligned is certainly a lighter touch than the ESA’s supervisory expectations expressed in their updated Joint Supervisory Statement on sustainable finance disclosures regulation issued in late March.”

She added: “It also seems to extend greater flexibility to funds than the Taxonomy Regulation itself, as the regulation requires taxonomy-alignment disclosure where a fund invests in an economic activity that contributes to an environmental objective, not simply where the fund intends to be taxonomy-aligned. It may be the case that further guidance will be issued by the CBI and it has made it clear that while this is its current position, its position may change.”

Irish Funds, the investment funds industry body, is currently considering its response to the CBI’s expectations and is gathering feedback from members.