Central Bank of Ireland Publishes Expectations on SFDR Compliance

What You Need to Know

The review assessed Irish domiciled UCITS managers and AIFMs (“ManCos”) on SFDR implementation and adherence to ESMA supervisory guidance in the context of sustainability. While ManCos’ overall efforts and engagement were positive, the Central Bank noted there is an “ongoing maturing of approach” and identified areas requiring focus, particularly around ongoing monitoring, data quality challenges and clarity of disclosures. The Central Bank set out its findings and expectations across four themes.

Theme 1: Sustainability Risk Integration and Monitoring

In reviewing how ManCos ensure compliance with SFDR, the Central Bank looked at governance and due diligence during fund/delegate onboarding, the metrics/data assessed to substantiate investment strategies and how controls are documented. For index tracking funds, after initial due diligence of the index, many firms rely heavily on index providers to ensure Article 8/9 funds are meeting the specific environmental/social (“E/S”) characteristics being promoted, or sustainable objective.

Expectation 1: Robust, Documented Control Frameworks for SFDR Compliance

The Central Bank expects ManCos to maintain documented, effective control frameworks that ensure ongoing SFDR compliance across all funds. This includes structured governance over fund and delegate onboarding, clearly defined due diligence of investment strategies and data and integration of sustainability risks within risk frameworks and the three lines of defence.

To counter the overreliance on delegate attestations, any confirmation from a delegate should include the necessary details to assess that the portfolio is in compliance with Article 8/9 requirements. While many ManCos deploy significant resources to oversight, in some cases, there was limited oversight coverage across fund ranges. ManCos should monitor resourcing, skills, expertise and knowledge appropriate to the nature, scale and complexity of funds in scope of SFDR (including Article 6 funds).

Theme 2: Data Limitations

While data quality is improving, data availability and reliability remain significant challenges. ManCos consistently referred to challenges in availability and interpretation of available data, including concerns with large volumes of data, multiple data providers and costs. ManCos are expected to conduct ongoing due diligence of ESG data and data providers and ongoing review of ESG disclosures. Where delegate attestations are used, ManCos must be able to proactively and independently assess funds’ compliance.

The Central Bank noted that many ManCos adopt 0% minimum commitment to taxonomy-alignment investments due to lack of reliable or consistent data and to avoid regulatory breaches, maintain significant buffers between actual and minimum sustainable investment thresholds. While understandable, these positions should be periodically reassessed as data improves. The Central Bank also observed that a large portion of ManCos do not yet consider Principal Adverse Impacts at entity level due to data constraints.

Expectation 2: Proactive Management of Data Limitations and Due Diligence of Data Providers

ManCos should identify and address data constraints at the earliest stages of strategic planning and fund onboarding, ensuring they can fulfil monitoring and oversight obligations. Ongoing due diligence on data providers is expected to ensure data is reliable, accurate and up to date.

Theme 3: SFDR Disclosures

The Central Bank assessed consistency between SFDR disclosures and individual fund portfolios and identified (i) funds with vague language in describing E/S characteristics being promoted or sustainable objectives, in some cases lacking metrics that can be quantifiably assessed and (ii) inconsistent approaches to website disclosures (i.e. disclosing the index methodology on the webpage or alternatively just including a link – the use of inaccessible links in certain cases was noted by the Central Bank). Investors must be able to understand how the strategy disclosed aligns with the portfolio.

Expectation 3: Clear, Specific and Non‑Misleading SFDR Disclosures

There must be robust procedures to ensure product disclosures are clear and not misleading. Clear and detailed disclosure of binding elements of the strategy are expected. When a fund uses exclusions as a binding element, there should be explicit thresholds, what constitutes “involvement” or ESG score that would trigger exclusions should be clear.

Binding elements cannot be disapplied. Where a fund tracks an index, the ESG criteria of the index should be detailed in the binding elements; merely stating that a fund tracks the index is insufficient. ManCos should have in place documented procedures and processes in place for regular review and approval of pre‑contractual, website and periodic disclosures to ensure consistency with SFDR.

Theme 4: SFDR Regulations and Guidance

The Central Bank acknowledges the interpretative challenges in SFDR due in part to a lack of specific guidance and/or evolving guidance, leading to compliance challenges and updates to internal processes and procedures for ManCos.

Expectation 4: Vigilance to Evolving Regulations and Consistent Interpretations

Varying interpretations of SFDR and data used to support ESG components of funds can lead to increased risks of non-compliance and greenwashing. Noting the European Commission’s plans to update SFDR will take a number of years before being finalised, ManCos should strive to be clear and transparent in complying with SFDR in the meantime, including considering how disclosures will be understood by end investors. ManCos should remain vigilant to ongoing developments within the SFDR framework to ensure they are considered without delay to prevent non‑compliance.

Next Steps

The Central Bank noted there are areas that require a marked improvement, particularly ongoing monitoring processes and quality of SFDR disclosures.

It expects all ManCos to (i) review and consider its feedback report in conjunction with ESMA’s Final Report on the CSA and (ii) to discuss the report with their boards and relevant personnel to ensure the Central Bank’s expectations are considered.

Further Information

For further information, please reach out to your usual Maples Group contact or any of the persons listed on this page.