With the 2021 UN Climate Change Conference (COP26) taking place in Glasgow in the first two weeks of November, interest in sustainable finance as one weapon in the arsenal to battle climate change has never been higher.
The publication of Ireland’s Sustainable Finance Roadmap[i] in the weeks preceding the conference was therefore timely. This comprehensive document outlines many of the initiatives that have been taken to date in Ireland with respect to sustainable finance and also outlines Ireland’s plans to build on its international reputation as a global financial centre, including the creation of an International Sustainable Finance Centre of Excellence. The roadmap sets out a strategic framework to support the further development of the international financial services sector in Ireland to 2025 and to establish Ireland as a top-tier location of choice for specialist international financial services.
As noted in the roadmap, Ireland is well positioned to build on its established reputation as a robust and reliable financial centre with an open, transparent and well-regulated investment environment. With close to €160 billion in sustainable-related assets managed or listed in Ireland, the jurisdiction already possesses significant strengths in sustainable finance.
This article looks at some of the Environmental, Social and Governance (ESG)-related initiatives that Ireland has promoted to date, as outlined in the roadmap, before focusing on the implementation of the EU Sustainable Finance Disclosures Regulation (SFDR) and the EU Taxonomy Regulation in Ireland, both pieces of legislation forming key elements of the EU’s Sustainable Finance Action Plan.
ESG-related Initiatives To Date
Building on its existing strengths, Ireland has been at the forefront of efforts to mainstream the sustainable finance agenda through a number of significant initiatives.
Ireland’s talented, educated workforce has always been a significant boon for our financial services industries and there has been a notable focus in recent years on developing sustainable finance skills to ensure that the appropriate resources are available to support the sustainable finance agenda. Over the past two years, Sustainable Finance Skillnet (a government agency tasked with talent development to support Irish businesses) has invested close to €1 million, developed new courseware, and facilitated over 2,000 professionals in 420 companies to upskill.
Attracted by Ireland’s pool of top renewable energy finance talent and the decades of experience of Irish companies in developing, financing and delivering large-scale wind and solar projects, a number of European and global names are basing teams in Ireland.
Positioning Ireland as a centre of excellence for ESG-related bonds, Euronext Dublin is the hub for the Euronext Group ESG bond listings which include green, social, sustainability and sustainability-linked bonds, including blue bonds, which raise capital to finance marine and ocean-based projects. In 2018, Ireland was among the first wave of European countries to issue a sovereign green bond, with €6.5 billion raised to date to allocate to Irish government climate action priorities. Cumulative ESG bond issuances listed from Dublin totalled €113 billion as at the end of September 2021, including just over $2 billion in green bond listings by the World Bank and its commercial arm, the International Finance Corporation (IFC).
Within the Irish banking sector, major banks headquartered and operating in Ireland are taking a leading role and are engaging in green and sustainable finance across their lending book and capital market activities. Domestic and international banks are supporting the issuance of green bonds, have launched a new €50 million cleantech investment fund and are developing a social bond framework. The banks also offer attractive lending rates for green products, for example, car loans and mortgages and a nature-based funding instrument for carbon sequestration, biodiversity, and public amenities.
In September 2021, the Irish Strategic Investment Funds (ISIF) – Ireland’s sovereign development fund – announced an investment programme of €1 billion over the next five years to fund climate action projects. ISIF will partner with global investors to raise private capital in support of Irish business and projects that are developing solutions to climate change, focusing on sustainable infrastructure and new technologies including energy efficiency, renewables, forestry, and waste. In 2018, Ireland became one of the first countries to divest public money from fossil fuel assets through ISIF.
This year, the fourth annual Climate Finance Week Ireland event held in October paved the way for further discussions at COP26. This annual public-private series attracted over 7,000 virtual attendees in 2021 and provides an opportunity for ideas and actions in areas such as climate disclosure and reporting to be developed into fully fledged initiatives.
The Irish Sustainable Finance Roadmap aims to unlock Ireland’s potential so that the financial sector can manage the risks and seize the opportunities in the transition to net zero and to act as “a catalyst and accelerator for public-private action”. Through public-private collaboration, the roadmap is focused on development of talent, preparation of industry, leveraging digital solutions, enhancing the enabling environment, and promoting and communicating Ireland’s sustainable finance priorities and capabilities. Described as the “linchpin” of the roadmap, the establishment of an International Sustainable Finance Centre of Excellence, to be operational by mid-2022, will focus on the practical acceleration of the sustainable finance agenda at a policy, regulatory, and market level.
Implementing The SFDR And Taxonomy Regulation
Ireland’s investment funds industry plays a central role in the mainstreaming of the sustainable finance agenda in Ireland. Ireland is the third largest funds domicile in the world, with over €5.2 trillion in assets under administration and over 1,000 fund managers from more than 50 countries having assets administered in Ireland. Ireland’s established reputation as an international fund domicile of choice, together with the initiatives adopted by the financial services industry and the Irish government to develop sustainable finance expertise and experience, make Ireland an attractive option for fund managers wishing to establish green or socially responsible funds.
The legislative requirements applicable to Irish investment funds are predominantly derived from EU law. The EU’s Sustainable Finance Action Plan, which is aimed at funding the EU’s ambitions in the European Green Deal, imposes significant new obligations on asset managers, designed to ensure that investors are provided with clear, comparable sustainability information about financial products to enable them to make informed investment decisions and to protect against “greenwashing”.
The implementation of the SFDR and the Taxonomy Regulation pose a number of challenges, many of which arise from the fact that the application dates of the legislation differ, with the first set of obligations arising under the SFDR applying from 10 March 2021 and the Taxonomy Regulation applying from 1 January 2022. Furthermore, there have been delays in the EU legislative process, which mean that detailed “Level 2” rules, elaborating and expanding upon the legislative requirements in the principal regulations, will not apply until 1 July 2022 at the earliest. The delay is intended to facilitate the finalisation and orderly implementation of the Level 2 rules. This staggered implementation timeline means that fund managers must review and update their offering documents multiple times during a short period in order to comply with the evolving requirements.
The ongoing and pragmatic engagement by the Central Bank of Ireland (Ireland’s financial regulator) with industry has been constructive in meeting these implementation challenges. In order to meet the March 2021 deadline, the Central Bank agreed to a fast-track procedure to facilitate fund managers in updating their offering documents. In relation to the looming 1 January 2022 deadline, the Central Bank of Ireland has again agreed to a fast-track filing process. Further evidencing the regulator’s commitment to constructive engagement, in a letter to industry dated 3 November 2021 outlining the Central Bank’s supervisory expectations regarding climate and other ESG issues, the Central Bank announced it will establish a Climate Risk and Sustainable Finance Forum which will bring together stakeholders to share knowledge and understanding of the implications of climate change for the Irish financial system.
A survey conducted by the Irish Funds Industry Association following the March 2021 filing deadline indicated that 83 per cent of Irish domiciled funds were classified as Article 6 funds (that is, funds that do not promote environmental or social characteristics or do not have a sustainable investment objective); 15 per cent were classified as Article 8 Light Green Funds (that is, funds that promote environmental or social characteristics); and 2 per cent were classified as Article 9 Dark Green Funds (that is, funds with a sustainable investment objective).
It is felt that the lack of clarity relating to product classification, the regulatory uncertainty regarding the content and timing of the Level 2 measures, and the current data availability challenges[ii] make it difficult for fund managers to adjust their fund ranges in line with the new requirements. It is anticipated that, as the requirements become clearer and a common approach to interpretation emerges, there will be further growth of Article 8 and Article 9 funds. This will also be fuelled by increasing investor demand that funds fall within these classifications.
The Irish Sustainable Finance Roadmap notes:
“The reorientation of the financial system towards sustainability in only beginning (with the share of financial assets contributing to sustainability still representing only 5% of global financial assets) but it has a clear trajectory with real opportunities for countries, companies and communities that show leadership.”
Considering the ESG-related initiatives adopted to date, the action points in the roadmap focused on establishing Ireland as a top-tier location of choice for sustainable finance, and the ongoing efforts to ensure that Ireland is at the forefront in efforts to implement the EU’s Sustainable Finance Action Plan, it is clear that Ireland is showing real leadership in this space.
[ii]In relation to data availability challenges, the Irish Funds Industry Association recently conducted an ESG Data Vendor Survey which revealed “patchy coverage on several ESG data points and a wide range of variance in the reported data with low levels of comparability”: https://irishfunds-secure.s3.amazonaws.com/1629905455-Principal-Adverse-Impacts-Reporting.pdf
Tara Doyle is a partner and head of the Asset Management and Investment Funds Department at Matheson. Tara currently serves as Chair of the Irish Funds ESG Policy, Legal & Regulatory Working Group.
Brónagh Maher is a professional support lawyer in the Asset Management and Investment Funds Department at Matheson. She also lectures in Funds Law at Maynooth University, Ireland.