According to The Climate Bonds Initiative, a total of US$269billion Green Bonds were issued in 2020 resulting in an average yearly increase of 60% since 2015. By the end of 2020, a cumulative total of US$1.05trillion Green Bonds have been issued globally.
December 2020 was also a seminal moment with the legislative approval of the Investment Limited Partnership (Amendment) Act 2020. This was a transformational development for the Irish funds industry, but it may also present an opportunity to further increase Ireland’s reputation for green investment capabilities. My question was, can the ILP enable sustainable finance to become more mainstream?
Although the ILP has existed under Irish law since 1994, the recent amendments to the Bill demonstrate the Government’s commitment to real asset investments and increasing Irelands competitiveness in the international investment fund market. Ireland is expected to quickly become one of the main jurisdictions of choice for real estate, private equity, private debt, and infrastructure strategies. It is expected that Ireland will be particularly attractive to US, UK and Asian investment managers as well as the wider international investment management community.
One of the most notable amendments to the Bill is the ability to now establish an umbrella ILP structure with segregated sub-funds. This allows for the segregation of liability between sub-funds with assets ring-fenced per sub-fund. The segregation of sub-funds also allows flexibility around different investment strategies for different investors. Reverting to ESG, the exclude and excuse provision allows for certain opt-outs around investments. For example, ESG focussed investors would unlikely want to make oil related investments and therefore could exclude the sub-funds within the umbrella that open it up to exposure in oil investments.
When it comes to the amended ILP and ESG, it provides a structure where investors in a certain sub-fund can focus purely on green investments. An ESG sub-fund, under the umbrella structure, with a green focus gives flexibility to increase green and sustainable investment strategies, while also enabling the systematic evaluation of ESG performance. The European Sustainable Finance Disclosure Regulation (EU 2019/2088) (‘SFDR’), came into effect on 10 March 2021. Given its broad ranging scope for asset managers, whether active in the ESG space or not, having the ILP structure now available in Ireland will be a major selling point in Ireland’s ability to both facilitate the segregation of investment strategies and allowing investors to participate in differing ESG focussed investments and strategies. This will no doubt enable these asset managers to effectively gather the relevant data to meet the SFDR reporting obligations.
One of the initial steps in establishing an ESG focussed sub-fund will be to determine whether it falls within Article 8, being Light Green, Article 9, being Dark Green, or non-ESG, under SFDR. With “sustainable investing” as a primary focus of the investment strategy, the sub-fund would reasonably fall within the Dark Green category and therefore meet the requirements of Article 9 under SFDR. From 1 January 2022, funds falling within the scope of Article 9 will need to report on the overall sustainability-related impact by means of sustainability indicators and also a comparison, where an index is used, between the sustainability impact of the fund and those of the designated index. Further information will also be required on the methodologies used to assess, measure, and monitor these impacts.
Under the umbrella ILP structure, a segregated Article 9 sub-fund can have a significant advantage for asset managers in terms of data gathering. This can be focussed on the specific “green sub-fund” and meet the disclosure requirements and reporting obligations to ensure compliance, whilst also being administratively cost effective. The current SFDR regulations are a work in progress and will evolve in line with market trends. However, the ability to segregate specific ESG focussed investments would ideally help to minimise the disruption across sub-funds within an umbrella structure to meet the obligations of the changing regulatory environment.
We would see the ILP as a complementary structure to sustainable investment strategies and giving asset managers the flexibility to tailor their strategies to meet investor appetite. On top of this, the ILP allows investors with an ESG investment focus to benefit from the strong Irish regulatory framework. With the EU increasingly focussed on sustainable finance and meeting the targets set by the Paris Climate Change Agreement, the ILP can bring us one step closer to closing the investment gap required to meet them.