Newsflash: Central Bank Report - Common Supervisory Action on Sustainability Risks and Disclosures in the Investment Funds Sector

The Central Bank of Ireland (the Central Bank) has published its feedback report on the 2024 ESMA common supervisory action (CSA) it conducted on Sustainability Risks and Disclosure in the Investment Funds Sector (the Report). While the Report concludes that its findings are broadly in line with regulatory expectations, the Central Bank is clear that it expects firms and their boards to consider its observations.

Background to the CSA

By way of background to the Report, in July 2023, the European Securities and Markets Authority (ESMA) launched a CSA with national competent authorities (including the Central Bank) in relation to the integration of sustainability risks and disclosures in the investment funds sector.

The purpose of the CSA was to assess, foster and enforce the compliance by firms with Sustainable Finance Disclosure Regulation (SFDR) related disclosures and associated measures on the integration of sustainability risks.

The Report presents the Central Bank’s findings on the CSA exercise, and in particular its assessment of firms compliance with standards in relation to the integration of sustainability risks and disclosures.

The Report is particularly important in light of the Central Bank’s ongoing focus on sustainable finance . In its 2025 Regulatory and Supervisory Outlook Report, the Central Bank noted that sustainable finance remains a key risk to the funds sector. The Central Bank noted in this report that regulated entities are expected to improve their responsiveness to climate change and to enhance their role in the transition to a net zero economy.

Within the report, the Central Bank identified varying levels of compliance with ESG regulation across the industry. Weaknesses identified include:

• inconsistent sustainability risk integration and monitoring;
• the quality of underlying data used by firms to support sustainability risk integration and monitoring;
• the reactive/proactive nature in which firms review controls to meet SFDR obligations; and
• firms’ appetite to continue to challenge the information contained in product and entity level disclosures to ensure these are clear and transparent for investors.

This summary outlines the Central Bank’s key observations and ongoing expectations in respect of four thematic areas.

CSA observations

1. Sustainability Risk Integration and Monitoring

Observations

During the course of the CSA, the Central Bank observed a spectrum in the quality of sustainability risk reporting across the industry. In particular, the Central Bank noted:

• for index tracking funds, a general reliance on index providers to ensure that an Article 8 or Article 9 fund meets the environmental and/or social (E/S) characteristics being promoted by the investment strategy on an ongoing basis or their sustainable objective (as relevant).
• an overreliance on delegate attestations in relation to ESG compliance of an Article 8 or 9 fund, without challenging the appropriateness of the attestation.

Central Bank Expectations

• Firms must have a documented SFDR compliance framework in place outlining ongoing due diligence and independent monitoring processes.
• Delegate attestations are expected to be assessed and challenged, where appropriate.
• The adequacy of firm resourcing and knowledge is expected to be monitored on an ongoing basis.

2. Data Limitations

Observations

• The Central Bank noted a significant improvement in the level of SFDR disclosure across the industry. However, challenges persist in complying with ESG regulatory requirements due to varying interpretations of ESG data. Consequently, many firms make 0% commitment to taxonomy-aligned investments.
• Methods employed by firms to ensure compliance with ESG strategies include due diligence on data sources, delegate attestations, ongoing fund compliance monitoring and continuous review of fund disclosures.

Central Bank Expectations

• As data quality improves, firms are expected to improve controls in order to support sustainability risk monitoring.
• Data constraints should be considered at fund onboarding stage to ensure firms can meet fund compliance monitoring obligations on an ongoing basis.
• Firms should carry out due diligence on data providers and data on an ongoing basis.
• Firms must be able to substantiate SFDR compliance when relying on attestations.

3. SFDR Disclosures

Observations

• The Central Bank independently assessed fund portfolios and SFDR disclosures using a proprietary dashboard.
• The Central Bank identified vague disclosures in fund documents and noted that this hinders informed investor decision-making.
• During the course of the CSA, the Central Bank identified inconsistencies across ESG disclosures, for example, between offering documents and website statements.

Central Bank expectations

• SFDR disclosures should be clear and not misleading.
• The binding elements used to attain the E/S characteristics promoted by a product should be made clear to investors. There should be no option to disapply a binding element.
• For index tracking funds, it is not sufficient to state that a fund’s binding element is tracking the performance of an index. Rather, the criteria applied by the index should be detailed in the binding elements of the fund strategy.
• Firms should have a process in place to ensure that SFDR disclosures are monitored on an ongoing basis (to include funds that disclose under Article 6, 8 and 9 of the SFDR).

4. SFDR Regulations and Guidance

Observations

• As the SFDR has evolved, this has led to compliance challenges for firms.
• Consequently, firms often apply conservative methods in their application of the SFDR to avoid the risk of non-compliance.
• Firms expressed a need for further guidance on SFDR related disclosure requirements to ensure compliance with the framework.

Central Bank Expectations

• The Central Bank acknowledges a general inconsistent application of the SFDR framework, which has led to greenwashing in some cases.
• The Central Bank has observed inconsistent interpretations of ESG data by firms in substantiating ESG claims in fund documents.
• The SFDR framework will be revised, but this will take time. Until then, firms are expected to comply with the existing SFDR framework and associated guidance.

Next Steps

The Report provides that the Central Bank’s approach to monitoring compliance in this area is an ongoing, maturing approach and a work in progress. The Central Bank expects the contents of the Report to be discussed generally at board level and with relevant staff members. Firms are advised to update SFDR related documentation to align with the expectations contained in the Report at the next available opportunity.

Please let us know if you would like to discuss the contents of the Report or if you would like to understand how it may affect your business.