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The Central Bank of Ireland ("Central Bank") has published a report providing an overview of the review it carried out as part of the European Securities and Markets Authority ("ESMA")...
Following the publication of ESMA's report on its CSA on
sustainability risks and disclosures earlier this year, the Central
Bank of Ireland has now published its own report setting out its
findings and expectations arising from the review it conducted as
part of the CSA.
The Central Bank of Ireland ("Central
Bank") has published a report providing an overview of the review it
carried out as part of the European Securities and Markets
Authority ("ESMA") common supervisory
action ("CSA") on sustainability risks
and disclosures. ESMA published its own report following the CSA on 30 June 2025. Due
to the Central Bank's supervisory focus on sustainability risks
and disclosures, the Central Bank has on this occasion prepared a
detailed report, as opposed to a "Dear CEO letter", as
would have been prepared following previous CSAs. The findings from
the CSA and the Central Bank's review will inform future
supervisory priorities.
Overview
Overall, the Central Bank found that fund management companies
("FMCs") demonstrated an appetite to
comply with the sustainable finance framework and positively
engaged with the Central Bank throughout the review. While all FMCs
have introduced process and controls to support sustainability risk
monitoring, some FMCs need to develop these processes and controls
further, to make them more robust and effective. There were
instances where process were not documented and approved in a
formalised manner. The issue of data availability was a common
theme during the regulator's engagements with FMCs. The Central
Bank also found that the evolution of frameworks, briefings and
guidance in this area has led to FMCs applying conservative methods
to avoid the risk of non-compliance.
The Central Bank identified several areas for improvement
relating to: (a) inconsistent sustainability risk integration and
monitoring; (b) the quality of underlying data used to support
effective sustainability risk integration and monitoring; (c) the
reactive / proactive nature in with FMCs review controls to meet
Sustainable Finance Disclosure Regulation
("SFDR") regulation and guidance; and
(d) FMCs' appetite to continue to challenge the information
contained in product and entity level disclosures to ensure that
they are clear and transparent for investors.
The key findings and expectations of the Central Bank are set
out in the table below.
Theme
Findings
Expectations
a)Inconsistent
sustainability risk integration and monitoring
Index-tracking funds: The CSA team
noted that many FMCs rely heavily on index providers to ensure that
the Article 8 or Article 9 SFDR funds are meeting the environmental
and social characteristics being promoted by the investment
strategy on an ongoing basis or their sustainable objective. It was
noted that FMCs rely on the application of the methodology by the
index providers following the initial due diligence performed by
the fund on the index and the index provider.
Delegate attestations: In some instances, the
Central Bank identified, in the context of the FMC's completion
of ongoing monitoring activities, an overreliance on delegate
attestations.
The Central Bank's expectation is that all FMCs have a
documented, robust and effective control framework in place that
ensures their funds under management comply with the requirements
of SFDR.
This should include effective ongoing due diligence of funds,
data and delegates, combined with consistent independent monitoring
carried out across all funds.
FMCs should ensure the information provided as part of delegate
attestations contains necessary details to actively assess fund
compliance.
FMCs should continue to monitor their level of resourcing,
skills, knowledge and expertise on an ongoing basis relevant to the
nature, scale and complexity of their funds in scope of Article 6,
Article 8 and Article 9 SFDR.
b)Data
Limitations
FMCs interpreted the same data sources differently, leading to
inconsistent monitoring outcomes.
Some FMCs do not always have the relevant data to perform
detailed monitoring of every fund and in some instances, rely on
information provided by delegates.
A significant majority of funds disclosing under Article 8 or
Article 9 SFDR have adopted a 0% minimum commitment to
taxonomy-aligned investments. The rationale provided for such
commitments was the lack of reliable and consistent data required
to confidently report an appropriate level of minimum
investment.
The CSA highlighted that, as data becomes more readily
available and consistent, FMCs are more capable of enhancing their
controls. Data constraints should be identified and considered in
depth at the earliest stage of strategic planning and fund
onboarding to ensure FMCs have the ability to fulfil their fund
compliance monitoring obligations.
FMCs are expected to perform appropriate due diligence on the
data and data providers on an on-going basis to ensure the data
used to substantiate the requirements of SFDR is accurate, reliable
and up to date.
FMCs should be in a position to document and verify the
underlying data used to substantiate SFDR compliance in instances
where FMCs are using attestations to conduct fund monitoring and
oversight.
c)SFDR
Disclosures
There is a need for enhanced transparency at product level. The
Central Bank identified funds with vague language when describing
the sustainable investment objective or the promotion of
environmental or social characteristics. In some instances, there
was a lack of specific metrics, thresholds, or key terms that could
be quantifiably assessed.
The Central Bank also identified inconsistent approaches
applied to website disclosures. For example, some FMCs include
links to index methodologies, and these may not always be
accessible, while others include all relevant information on the
webpage.
FMCs should have robust frameworks in place to ensure that the
disclosures made to investors in accordance with SFDR are clear and
not misleading.
There should be clear and detailed disclosure regarding the
binding elements used to attain each of the environmental or social
characteristics promoted by the fund, or the sustainable investment
objective.
Where a fund applies exclusions as a binding element of the
strategy, there should be clarity regarding the thresholds applied,
what constitutes "involvement" or the ESG score that
would result in a fund excluding certain companies from investment.
There should be no option within the disclosure to dis-apply the
binding element of the strategy.
Where a fund tracks an index, the ESG criteria applied by the
index should be detailed in the binding elements. It is not
sufficient for a Firm to provide that tracking the performance of
the index is the fund's binding element. Finally, FMCs should
keep such disclosures under regular review to ensure the accuracy
of the content continues to align with these expectations.
The Central Bank expects that FMCs have processes in place to
regularly review and approve the language contained in
pre-contractual, website and periodic disclosures to ensure that
these are aligned and meet the requirements of the SFDR. These
reviews should be documented and conducted periodically.
d)SFDR Regulations and
Guidance
FMCs highlighted enhancements to specific guidance and criteria
that would support a consistent application of certain elements of
SFDR.
FMCs communicated the need to adapt to changing guidance (eg,
Q&A's) as SFDR matures and that this has led to compliance
challenges due to the need to revisit existing processes to reflect
the changes.
The Central Bank acknowledges that there are varied
interpretations of some of the key components of the SFDR
framework. These interpretations have led to inconsistent
sustainability processes being applied by FMCs and contributes to
an increased risk of non-compliance and potential
greenwashing.
This inconsistency is also evident in the varied
interpretations and applications of data and data methodologies
that FMCs are using when substantiating the ESG components of their
funds.
The Central Bank acknowledges the European Commission's
plan to publish a proposed revision to SFDR. However, this review
will take time to develop, finalise and implement. Therefore, FMCs
should strive to be as clear and transparent as possible in
applying SFDR, including considering how their disclosures will be
understood by the end investor.
FMCs should remain vigilant to the SFDR, and where updates to
SFDR are implemented or additional supporting guidelines are
published, ensure that these are considered appropriately and
without delay to avoid instances of non-compliance.
Next Steps
The Central Bank expects that FMCs review and consider the
contents of this report, together with ESMA's report on the CSA
published in June. The Central Bank report should be discussed with
the board and relevant personnel with each FMC to ensure that the
observations and expectations outlined by the Central Bank are
considered.
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.
