Funds Industry Engagement Event: Asset management sustainable finance seminar

When 14 November 2022 9:15 AM

When 14 November 2022 from 9:15am to 12.10pm
Where Central Bank office, North Wall Quay


The Central Bank of Ireland (the “Central Bank”) hosted an in-person Funds Industry Engagement Event entitled “Asset management sustainable finance seminar” on Monday 14 November 2022.

The event was attended by the Central Bank’s Deputy Governor, Consumer & Investor Protection, Derville Rowland, the Director of Securities and Markets Supervision, Patricia Dunne, the Head of Funds Supervision Division, Darragh Rossi, and industry participants including senior representatives from the asset management sector (such as management companies, depositaries and administrators) and industry associations (which included Irish Funds, IAIM and IFDA).

The purpose of the event was to cover a broad range of sustainable finance-related topics that are specifically relevant to the asset management sector, including the importance of the Sustainable Finance Disclosure Regulation (SFDR), the impact of the requirements on investment funds, matters and challenges related to data availability and the Central Bank’s supervisory strategy in this area.

Opening Remarks

Derville Rowland, Director General, Deputy Governor, Consumer & Investor Protection, opened the event. The full opening remarks are available on the Central Bank’s website. The key messages included: 

  • The Central Bank’s concern with the risks to regulated firms’ and financial stability, arising from increasingly commonly occurring climate events as well as the transition to a sustainable economy.
  • The Central Bank’s emphasis on ensuring that investors are fully informed and in no way misled where investments or financial products are described as green or sustainable. In such cases, the claims made must be meaningful and accurate and based on reliable parameters that are consistently applied. 
  • Investors high expectations for the asset management / funds sector with regard to sustainable finance and how critical it is that the sector is positioned to support a timely and effective transition to a more sustainable economy, and for this to happen, standards must be high.
  • A mention of the Central Bank’s intention to  publish an information note highlighting findings of the gatekeeper review of investment fund disclosures related to Level 1 and Taxonomy Regulation disclosures and Central Bank expectations around the implementation of a supervisory framework for the next phase of SFDR.

Market Keynote Speech: Re-focussing the Global Governance Architecture of Finance through a Climate Lens to provide a general overview of the challenges faced when incorporating Environmental, Social and Governance factors

Delivered by Sean MacHale, Head of Climate Change Advisory and Sustainability Services, Ernst & Young. The key messages from the presentation included:

  • Much more needs to be done in the fight to arrest climate change, we all know that.
  • Current policies and pledges for action up to 2030, even if fully delivered, would mean a rise in global warming of about 2.5 degrees Celsius, according to the UN climate agency.
  • The latest UN environment agency report has found that there is no credible pathway to 1.5 Celsius in place.
  • Only half of countries have put plans in place, despite promises made at last year’s COP conference in Glasgow.
  • In relation to mitigation, despite progress globally, we are behind in our efforts to do what the science tells us we need to do to keep to 1.5 degrees.
  • In 2021, the world used 9% more coal than in 2020.
  • An IAEA report points to a peak in fossil fuel usage by 2025, as higher energy prices push more countries towards renewables, despite 300 gigawatts of new coal power currently in the construction pipeline.
  • However, even if the IAEA report comes to fruition, we are not doing enough to avoid severe climate change impacts.
  • In terms of mitigation, we are seeing impacts in many parts of the world. China has experienced the worst drought on record and Asia's longest river, the Yangtze, was recently at its lowest level in history.
  • Europe had its worst drought in 500 years over the summer and it was possible to walk across the River Rhine, one of Europe’s busiest shipping lanes. The heatwave in mid-July resulted in more than 10,000 excess deaths.
  • EY research has identified three priorities to support strategic decision making on ESG and sustainable growth as follows (i) board oversight (ii) reward and remuneration and (iii) trust and transparency.
  • The pace of change is not fast enough and therefore the current financial system needs more fundamental recalibration. Micro stewardship and individual engagement, while important, will not on their own deliver the transition at the speed required.
  • Equally, while the global governance architecture is being modified and ESMA’s prioritisation of ESG disclosures as part of its strategic supervisory priorities is most welcome, however, the presenter’s view was that a more fundamental alteration is required.
  • Put simply, we need to capture the cost of capital versus the cost to climate through capital. When the cost of capital equates to the systemic risk that regulators, governments and global agencies alike all agree upon, it will divert real-time capital from companies who trade in high emissions sectors and industries, while rewarding those who are decarbonising and providing green financing solutions to empower economies for decades to come.
  • Despite the above the presenter was confident that we are on the precipice of real economic change which is assisted by having an engaged asset management sector.

Data Keynote Speech: Presentation on data challenges and opportunities associated with the sustainable finance agenda

Delivered by Murat Bozdemir, ESG Product Manager, Bloomberg. The key messages from the presentation included:

SFDR: What are the key data challenges

  • Coverage PAI: Is there sufficient company reported data? There is a lack of reported data in relation to Scope 3 GHG emissions, biodiversity risks, sustainable water use and gender pay gaps. Reported ESG data by companies is increasing but it is still low for some key PAIs, in particular water and biodiversity.
  • Data does not match the technical terms of the PAI: e.g. biodiversity metrics, carbon intensity by EVIC.
  • PAI Portfolio measurement and aggregation. Company level reported data needs ‘normalisation' to be in line with SFDR PAI and requires specific portfolio aggregation. Also questions from industry were mentioned in relation to weighting for non-reporting companies, fiscal year alignment and PAI 6 energy consumption intensity per high climate sector.
  • Quality challenges in reported company data: e.g. EU Taxonomy. 1,956 European companies are in the scope of the Non-Financial Reporting Directive (NFRD), with 1,053 reporting eligibility and 534 reporting alignment. Mislabelling and inconsistency examples were given, with resolutions for both companies referenced involving corporate engagement.
  • Sustainable investment, DNSH PAI and good governance. Challenges in sustainable investment were discussed, such as different industry approaches and comparability between funds or asset owners with multiple managers. In addition, DNSH SFDR applies to all PAIs, however only approx. 22% of companies have a year on year improvement of 4 or more PAIs.
  • SFDR Article 8 and 9 product level reported data. Trends in Article 8 and 9 versus Article 6 fund launches and flows were discussed. Environmentally sustainable investments are leading the trend over Socially sustainable investments. EU Taxonomy alignment pre-contractual reporting level is still low.
  • Multi-vendor data sources: aggregating data and linking vendors with different IDs. The example of an automobile stock was given, where data from the ultimate parent has been linked to the child entities using the corporate structure data.
  • Interoperability: TCFD, SFDR, IEA, NGF and IPCC. The regulatory challenge means that it is something that needs to be actively managed.

Points to watch for 2023 and beyond were also discussed.

Regulatory Keynote Speech: ESMA update on European regulatory developments

Delivered by Antonio Barattelli, Team Leader for Investment Management, ESMA. The key messages from the presentation included:

  • A focus on three main areas in relation to SFDR: (i) the work that ESMA has been carrying out regarding the EU Single Rulebook (ii) a description of what ESMA is doing to promote common supervisory standards across the EU in relation to how SFDR rules are applied and (iii) the topic of greenwashing
  • The three topics are very much interlinked and given the novelty of these areas, it is also very evident how complementary the development of the legislative framework is with the concrete application of supervision of the standards.

EU Single Rulebook

  • The background and context to ESMA’s work over the last number of years was provided, with highlights and milestones, the challenging nature of the Joint Committee approach, the need for striking a balance between comprehensibility and comparability in disclosure.
  • In April this year, another mandate was received from the European Commission inviting ESMA to propose amendments to the framework in relation to information to be provided in pre-contractual and periodic documents and websites for exposure to investments in fossil fuels (specifically gas) and nuclear energy, to reflect the new requirements under the complementary Delegated Act from the Taxonomy Regulation.
  • Very tight timeframe to provide the amending technical standards, which had to be delivered by September of this year. Unfortunately, it did not allow time to carry out the proper consultation. The EC has recently adopted these revised technical standards and they are currently subject to scrutiny by the European Parliament and Council before formal entry into force. It is expected quite soon.
  • ESMA is still working on the EU Single Rulebook mandate received from EC in April last year to review the indicators for PAIs and the financial product disclosures in the SFDR Delegated Regulation. Currently ESMA is considering all elements from these mandates, discussing with the NCAs and expects to launch a public consultation in the coming months.

Supervisory convergence

  • It is important to recognise that disclosures are complex for investors to understand and technically challenging for the market to digest.
  • ESMA welcomes the significant efforts made to comply with the implementing measures of the SFDR that apply from the beginning of next year in a market that is still evolving.
  • ESMA will continue to consider how to simplify the disclosures for investors and streamline the rules for financial market participants.
  • But there are a number of constraints, given that ESMA has to act within the boundaries of the Level 1 legislation, so there are limits in relation to what can be achieved.
  • An example was given of something ESMA has been observing in the market in relation to the push for more supervisory convergence across the EU. In practice, disclosures are often being used as a product classification. The status of Article 8 and Article 9 funds is being used in marketing materials by many fund managers as proxy quality labels for sustainability.
  • Data from the last 12 months shows 4,500 UCITS funds have either launched or reclassified as Article 8 and for Article 9 a further 500 funds, which between them account for over 50% of total UCITS AUM at European level.
  • Also ESMA is monitoring overall trends in the reclassification of funds and while it recognises that some areas of the SFDR were only clarified recently and as such a period of adaptation is understandable, it is important that disclosures in relation to sustainability to investors are fair and as such, ESMA encourages careful consideration in relation to promises made to investors.
  • ESMA is particularly concerned with investors in Article 8 funds and it is very important that investors do not take the mere presence of Article 8 disclosure as an indication of sustainability per se.
  • Looking forward, a possible comprehensive solution may be introducing sustainable labels for financial products in order to create more clarity for investors, but it would require legislative changes.
  • Also ESMA is working with other ESAs to reduce over-disclosure by certain funds under Article 8, to avoid misleading disclosure to investors about the sustainability of products.
  • While Q&As and Guidance remain key part of ESMA day to day work, it is increasingly shifting focus to more effective coordinated supervision on the ground and measuring the effectiveness of these activities.
  • Last month, ESMA announced a new Union Strategic Supervisory Priority (USSP) on ESG disclosures.
  • Notwithstanding the focus on supervisory activities, ESMA is not neglecting the need to provide further clarity on the SFDR framework and there is a need to continue to support industry in the practical application of the rules. Currently finalising a new set of formal Q&As covering disclosure in SFDR Delegated Regulation and it is hoped to publish imminently.


  • Promoting transparency and tackling the phenomenon of greenwashing is clearly one of ESMA’s priorities in the area of sustainable finance.
  • Therefore, ESMA is investigating greenwashing more closely and taking coordinated action in multiple sectors to find a common solution, both on the supervisory convergence side and in relation to the Single Rulebook work. This work will feed into ESMA’s response to the EC request from the three ESAs to provide detailed inputs on the understanding and definition of greenwashing, taking stock of the implementation of the SFDR within each of the 3 ESAs’ remit and identifying early market and supervisory challenges and also characterising the supervisory enforcement response and assessing it.
  • ESMA intends to publish a Call for Evidence to gather market feedback on the definition and understanding of greenwashing quite soon and this will feed into a progress report that ESMA is due to deliver to the EC in May next year.

Panel Discussion & Audience Questions

Darragh Rossi, Head of Funds Supervision, Central Bank, moderated this session. The panel consisted of Antonio Barattelli (ESMA), Murat Bozdemir (Bloomberg), Karoline Keane (Mediolanum International Funds Limited) and Maria Ging (BlackRock.) The key messages from the discussion included: 

  • The focus of asset managers is providing solutions for savers and savers want to put their money to work in sustainable ways now. To help savers make right decisions, they need clear, comparable and high quality Taxonomy related disclosures. However, we are not starting from an ideal place in relation to providing the necessary disclosure. On clarity, multiple speakers have referenced the complexity of the regime and that has led to product labelling. It is disappointing to see some EU jurisdictions already goldplating, which makes disclosures less comparable and challenges managers’ ability to distribute on a cross-border basis. On high quality disclosure, as was referenced in the Bloomberg presentation, much of the data is either not yet available or of questionable quality. Quoting the words of Commissioner McGuinness, perfection should not be allowed to get in the way of progress. It will inevitably be an iterative process. In summary, a huge amount of work has been done, but a huge amount remains.
  • Disclosures are very important and a lot of time is spent on the disclosure and DNSH element and how we do it, but not so much time seeing the effect of it. By way of example, on 7th November, MSCI added 13 companies to their UN Global Compact violators list, due to allegations made against those companies. Although they are only allegations, that data point is now there. And it therefore adds a data point to asset managers’ qualitative reasoning to decide whether to keep investing in the company or divest. It then links right through to investors.
  • The Central Bank’s publication today is very helpful, particularly in relation to expectations, the supervisory framework and ESMA’s proposed naming conventions for funds.
  • The ESMA Common Supervisory Action (CSA) for 2023 will be instrumental to the response on greenwashing. Secondly, it will look at the rules under SFDR Level 1 and 2 on the disclosure side and also on the integration of the sustainability risks as per the Level 2 requirements under UCITS and AIFMD and how these are being implemented. An additional source of inspiration would be the supervisory briefing that was mentioned earlier which sets out a number of expectations and requirements. In terms of outcome, while acknowledging that CSAs may be cumbersome, they are nonetheless useful because they allow supervisory activities to be carried out on a given topic across the EU, which is in line with the direction of the Common Market and the harmonisation of supervisory practices.
  • From an industry perspective, the timing is very important. For the output of any CSA to be meaningful, it should really assess what industry believes are solid foundations and embedded process. Therefore, the preference would be for the CSA to be as late as possible in 2023 in order to give industry time to respond to the emerging market clarity. In terms of the framing of findings, it would be very helpful if ESMA were to take a similar type of approach as the Central Bank with the publication of today’s information note. Finally, in relation to cross-border marketing of funds, the “C” in CSA is very important and it is critical that there is the same approach in all jurisdictions for SFDR. The results of the CSA should ultimately include a commitment to phase out national goldplating.
  • In terms of timing, a precise commitment cannot be given, but it expected to be in the latter part of the year. In relation to goldplating, it is very much in ESMA’s mind and the CSA may be an opportunity to take stock later of possible divergences across the EU.
  • The most common question from asset managers is in relation to data availability, coverage and quality. The advice to anyone in the asset management sector would be to take a strategic, holistic and longer-term look and to take stock of the current position in relation to the data capabilities. Have a defined approach, try to ensure consistency around estimates and disclosure and what types of KPI you want to define. Lastly, think about how all of it is integrated into day-to-day processes.
  • Although it may not always feel as such, realistically speaking industry is well-prepared for the upcoming deadlines. Every conversation that has been had with investors, distributors, industry groups, compliance or investment and portfolio management teams involves sustainability implementation and it is a cross-collaboration piece.
  • As referenced at the beginning of the panel, industry however are acutely aware that this is an evolving landscape both on the investment and regulatory side so we expect to be iterating and improving post the implementation deadline of 31 December.

Closing Remarks:

Patricia Dunne, Director of Securities and Markets Supervision, closed the event. The key messages included:

  • Due to the rapidly evolving nature of sustainable finance and it being a significant risk facing the funds industry, it will be a focus of the Central Bank over the coming years.
  • Both regulators and industry participants have had to quickly grapple with new mandates and the implementation of requirements in order to develop approaches which are both manageable and in compliance with the spirit of the regulations.
  • While there are some elements of SFDR and the Taxonomy Regulation that are nuanced, it is also the case that (i) there is a good deal more clarity around many of the requirements such as the disclosure expectations being placed on products by the SFDR as we approach the level 2 deadline than was the case previously with level 1; and (ii) where issues have arisen, many of the same principles which the Central Bank would normally apply in terms of funds regulation are relevant.
  • While there is of course potential for improvements around data availability when assessing funds’ underlying investments, it is nevertheless helpful to have clarity from the European Commission on how Taxonomy alignment disclosures should be handled.
  • From a supervisory perspective, the Central Bank has identified certain areas that fund managers should be particularly conscious of. These include (i) the adaptation of risk management frameworks (ii) Article 8 ‘guardrails’ (iii) funds which have changed their classification under the SFDR (iv) fees & costs and (v) securities lending.
  • In conclusion, whilst the onus is on funds and fund management companies to ensure that they meet their obligations under the SFDR and Taxonomy Regulation, it is also crucial to have dialogue between supervisors and industry to share developments at a domestic and European level. This sharing of information and experiences is hugely valuable. The Central Bank looks forward to continued engagement on the topic into 2023 and beyond.

Attendance at this event was by invitation only.