CBI publishes information note on implementation of SFDR and Taxonomy

On 14 November 2022, the Central Bank of Ireland (CBI) published an information note setting out the findings of a review of investment fund disclosures, highlighting its expectations around the implementation of the SFDR and the Taxonomy Regulation and providing a roadmap for how the CBI will supervise these requirements in the future.

The note is aimed at informing market participants of the main disclosure issues encountered in the review and outlines risks that the CBI has observed in terms of potential greenwashing. The report also highlights areas of good practice identified and sets out the CBI’s expectations.

Gatekeeper Review

The note sets out the findings of the CBI’s “gatekeeper review” in which it assessed a sample of investment fund disclosures made by fund managers in compliance with their SFDR level 1 and Taxonomy Regulation obligations. The CBI had established a filing process for pre-contractual document updates from which it drew its sample.

Key Findings

SFDR Classification

• Relevant Requirement: Paragraph 28, ESMA Supervisory Briefing
• Finding: Fund documentation should clearly disclose the relevant SFDR classification (either Article 6, 8 or 9) without giving the impression of a “label” to investors. Where an existing investment fund proposes a change in its SFDR classification, the post authorisation submission should include a detailed rationale and justification explaining the basis for the proposed change.
• CBI Expectation: Adequate consideration must be given to what this change in classification may mean for existing investors in the fund (and what communication to investors may be appropriate as a result). Fund managers should keep such classifications under regular review to ensure their ongoing accuracy.

Generic sustainability risk and/or taxonomy alignment disclosures

• Relevant Requirement: Article 6 of the SFDR and Article 5 and Article 6 of the Taxonomy Regulation
• Finding: Some of the funds assessed only included generic sustainability risk and/or taxonomy alignment disclosure. The primary rationale given was that such disclosure avoids repetition and duplication across all fund documentation and is consistent with other general disclosures that were included throughout that fund’s documentation.
• CBI Expectation: Disclosures must be specific to the investment fund in question. Fund managers should keep such disclosures under regular review to ensure their accuracy.

Quantification of taxonomy-alignment

• Relevant Requirement: Article 5 and Article 6 of the Taxonomy Regulation
• Finding: Only a small number of funds provided a percentage proportion of investments in environmentally sustainable economic activities. A large proportion of the assessed funds indicated that they were not in a position to describe the proportion of a fund’s investments that are in Taxonomy-aligned.
• CBI Expectation: Disclosures around the quantification of taxonomy-alignment must improve. Fund managers should keep such disclosures under regular review to ensure their accuracy.

Integration of sustainability risks

• Relevant Requirement: Article 6 (1) of SFDR
• Finding: Funds generally provided a detailed outline of the reasons why sustainability risks were not relevant thereby fully addressing these requirements. In a number of cases, funds included statements that returns may be impacted by investment in certain products and that this will be factored into the investment decision-making process. However the disclosure did not provide specific information on how the impact on returns has been assessed.
• CBI Expectation: Where applicable, funds should provide a detailed outline of the reasons why sustainability risks are not relevant or provide an outline of how such risks are integrated into the investment decision making process. Funds should also include information on how the approach taken will impact returns. Such disclosures must be specific to the investment fund in question. Fund managers should keep such disclosures under regular review to ensure their accuracy.

Pre-contractual product disclosures – Benchmark Indices

• Relevant Requirement: Article 8 (1)(b) of SFDR
• Finding: In a number of funds, the disclosure provided lacked the expected detail in terms of how the designated index was consistent with the environmental and/or social characteristics the fund promotes. In certain instances, this requirement was further undermined by the insertion of statements to the effect that neither the fund manager nor the Investment Manager would monitor the composition of the Benchmark Index against the screening criteria applied on the basis that the index provider is responsible for screening investments in the index.
• CBI Expectation: Such practices are not considered appropriate and instead the fund managers should have processes in place to monitor, on an ongoing basis, the relevant index provider or delegate Investment Manager.

Naming convention for funds

• Relevant Requirement: Paragraph 19, ESMA Supervisory Briefing
• Finding: Of the funds assessed, the naming conventions were consistent with the fund disclosure outlined in its investment objective and strategy. However, funds’ names should not be misleading, the use of terms such as “ESG”, “green”, “sustainable”, “social”, “ethical”, “impact” or any other ESG-related terms should be used only when supported in a material way by evidence of sustainability characteristics, themes or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy and its strategy as described in the relevant fund documentation.
• CBI Expectation: Fund managers should ensure that fund names are not misleading. Fund managers should keep their Funds’ naming conventions under regular review to ensure their continued appropriateness.

Supervisory Roadmap

The information note also includes a non-exhaustive list of areas of interest that market participants should pay particular attention to as they progress their implementation of SFDR and Taxonomy regulation requirements. This list includes;

• Adaption of Risk Management Frameworks – fund managers are to consider suitability risks and factors when undertaking investment due diligence and take sustainability risks into account in their organisational procedures, resources, the management of conflicts of interest and risk management policies;
• Article 8 ‘Guardrails’ – fund managers are to carefully consider the relevant fund’s SFDR classification to ensure that it aligns with both the letter and the intention of the legislative requirements;
• Marketing Material - sustainability-related disclosures are to be consistent across fund documentation and marketing material;
• Fees & Costs – fees and costs associated with ‘green’ investment products should be transparent and proportionate and investors should not be subject to undue costs;
• Securities Lending –the CBI’s interest in whether funds that engage in securities lending whilst also promoting environmental and/or social characteristics and/or having sustainable investments as their objective are in a position to meet their environmental and/or social characteristics; and
• Fund Service Providers – the CBI’s intention to consider the role of fund service providers (eg. depositaries) when assessing SFDR compliance.

What’s next?

In order to facilitate the timely updating of fund documentation in line with the additional SFDR level 2 requirements that begin to apply from 1 January 2023, the CBI has adopted another filing process in which a sample of submissions received will be reviewed retrospectively to ensure a high standard of disclosure.

By January 2023 the CBI expects any information provided to investors (via fund documentation, marketing material or otherwise) to be fully aligned with the requirements of SFDR, the Taxonomy Regulation and related available guidance. Fund documentation must also be regularly reviewed and updated to ensure compliance with the requirements as well as the accuracy of information disclosed.