The Central Bank of Ireland (CBI) has warned that sustainability credentials will be increasingly scrutinised in order to avoid greenwashing and to channel capital towards genuinely sustainable activities.
In a new report on securities market risk, the CBI recommends that market participants should reduce carbon-intensive investments. Instead, they should focus on products that comply with sustainability criteria outlined in the EU’s sustainable finance disclosure regulation (SFDR), as well as the taxonomy regulation.
At the end of 2022, Irish investment funds had assets under management totalling approximately €4.18tn. As the race to net zero gains pace and the regulations for doing so increase, sustainable disclosures are becoming more critical. The report stresses the CBI’s demand that financial service providers comply with their regulatory obligations.
This echoes a statement made by Derville Rowland, deputy governor of the CBI, who said: “Where investments or financial products are described as green or sustainable, this must be meaningful and accurate and based on reliable parameters that are consistently applied both within jurisdictions and across Europe.”
Since January 2023, financial market participants in the EU with more than 500 employees are now obliged to disclose ESG information, as set out by the SFDR. As a result, firms must explain their ESG processes, and how they’re enacting them, while fund management companies must integrate sustainability risks into the management of their funds, conflicts of interest procedures, and risk management processes.
The European Securities and Market Authority, the EU’s financial market regulator and supervisor, has specified ESG disclosures as a strategic priority. As demand for ESG investments rises, the EU’s regulations are pushing fund managers to prioritise greater robustness in their considerations of ESG factors.
With the growth of the currently unregulated green bond market, there is a higher risk of mis-selling products labelled as ‘green’ in this sector. In response, the report notes that the CBI will increase its efforts to address this issue. The Irish green bond market, although relatively small, has grown from €17.1bn in December 2020 to €28.8bn in October 2022. By comparison, in October 2022 the Netherlands reported a green bond market share of €91.5bn.
In the absence of harmonised EU standards for the green bond market, the CBI “seeks disclosures pertaining to sustainability and green frameworks of issuers, and the management of proceeds”.
The EU green bond standard reached political agreement in February, but will likely enter into application by 2024. The report notes that the CBI will continue to seek second-party opinions in order to mitigate the risk of greenwashing, in lieu of the proposed regulation which “will act as a gold standard for green bonds”.
This page was last updated May 9, 2023
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