Central Bank of Ireland publishes Markets Update 11 (24 November 2022)

On 24 November 2022, the Central Bank of Ireland (the Central Bank) published Issue 11 of its regular Markets Update, in which it sets out alerts of interest to Irish regulated firms and other market participants.

Of the various items covered in this Issue, we would highlight, in particular:

• Publication of the Macroprudential Policy Framework for Irish Property Funds and the Feedback Statement to Consultation Paper 145 on Macroprudential Measures for the Irish Property Fund Sector
• ESAs launch joint call for evidence on greenwashing
• ESMA consults on rules for passporting for investment firms
• ESMA launches a consultation on guidelines for the use of ESG or sustainability-related terms in funds’ names
• ESMA issues advice on proposals for leverage limits on real estate funds in Ireland

1. Central Bank Macroprudential Policy Framework for Irish Property Funds

On 24 November 2022, the Central Bank of Ireland published its Macroprudential Policy Framework for Irish Property Funds (the Policy), introducing new limits on leverage and Guidance to limit liquidity mismatch in property funds.

This follows ESMA’s formal advice the same day, which confirmed that ESMA considered the leverage limit proposal which the Central Bank had notified to it was “appropriate to address the concerns relating to the stability and integrity of the financial system”.

The Policy introduces a limit of 60% to the ratio debt over total assets of Irish funds which have at least 50% of their assets under management (AuM) directly or indirectly invested in physical Irish property assets (Irish real estate funds).

From 24 November 2022, the Central Bank will only authorise new property funds with leverage below the 60% limit.

Although the Central Bank is allowing a five year implementation period for existing funds, lasting until 24 November 202, it expects funds to make “gradual and orderly progress” over this period to lower leverage levels. ESMA has also specifically advised the Central Bank to encourage Irish real estate funds “not to take advantage of the implementation period to delay unnecessarily their compliance with the leverage limits”.

There is an exemption from the limit for funds which invest at least eighty per cent of AuM in social housing subject to certain conditions.

In addition, Irish real estate funds which are involved in development activities will be allowed to use a different methodological framework for the calculation of leverage

For more detail, see our summary of the Policy Framework here.

2. ESAs call for evidence on greenwashing

On 15 November 2022, the European Supervisory Authorities (ESAs) - the EBA, EIOPA and ESMA - published a call for evidence (CfE) seeking input on potential greenwashing practices in the EU financial sector.

The CfE, which follows the European Commission’s May 2022 request for input from the ESAs, seeks

• views across the financial sector on how to understand greenwashing and the main drivers of greenwashing
• examples of potential greenwashing practices across the EU financial sector relevant to various segments of the sustainable investment value chain and of the product lifecycle
• evidence on potential greenwashing practices within and outside the scope of current EU sustainable finance legislation and
• any available data to help the ESAs gain a concrete sense of the scale of greenwashing and identify areas of high greenwashing risks.

Responses to the CfE must be submitted by 10 January 2023. A progress report is expected by the end of May 2023 and a final report should be published by the end of May 2024.

For more detail, see our summary of the CfE here.

3. ESMA consults on rules for passporting for investment firms

On 17 November 2022, ESMA published a consultation paper, “Review of the technical standards under Article 34 of MiFID II”, regarding the provision of investment services across the EU.

The consultation closes on 17 February 2023.

As a result of a number of factors (including the development of the single market and the digitalisation of financial services), ESMA and EU NCAs have recently noted an increase in cross-border activities to retail clients provided under the MiFID II free provision of services regime.

Although this is seen as a welcome development, the increase in cross-border activities by investment firms does mean that NCAs need to increase their focus on the supervision of cross-border activities and on cooperation.

The main proposals put forward by ESMA to assist in this process would require investment firms to provide information on the following additional items at the passporting stage:

• what marketing means the firm will use in host Member States
• the language(s) for which the investment firm has the necessary arrangements to deal with complaints from clients from each host Member State in which it provides services
• the Member States in which the firm will actively use its passport and the categories of clients targeted and
• the investment firm’s internal organisation in relation to the cross-border activities of the firm.

ESMA will consider feedback to the consultation in Q2 2023 and expects to publish a final report by the end of 2023.

4. ESMA consultation on guidelines for the use of ESG or sustainability-related terms in funds’ names

On 18 November 2022, ESMA published a consultation paper, “On Guidelines on funds’ names using ESG or sustainability-related terms” (the CP).

To ensure investors are protected against unsubstantiated or exaggerated sustainability claims, ESMA believes that ESG- and sustainability-related terms in funds’ names should be backed up “in a material way” by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy.

As a result, the CP seeks stakeholders’ views on draft guidelines to promote supervisory convergence in how the NCAs assess the use of ESG or sustainability-related terms in a fund’s name. In particular, ESMA is interested in feedback on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names.

The main elements on which ESMA is consulting are:

• a quantitative threshold (80%) for the use of ESG related words
• an additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold
• application of minimum safeguards to all investments for funds using such terms (exclusion criteria)
• additional considerations for specific types of funds (index and impact funds).

ESMA is proposing that the draft guidelines would become applicable from 3 months after the publication of their translation on the ESMA website. Funds launched prior the application date would be given an additional 6 month transitional period in order to comply with the Guidelines.

ESMA will consider the feedback it receives to this consultation after it closes on 20 February 2023 and will subsequently publish final guidance.

For more detail, see our summary of the consultation paper here.

5. ESMA advice on proposals for leverage limits on real estate funds in Ireland

See item 1 above and also our summary of the Policy Framework, here.