Of all the countries in the world, Ireland is the one most associated with the colour green: it’s the Emerald Isle after all.
But although it could be accused of having been a laggard in terms of sustainable finance in the past, it is doing its upmost to get up to speed and, if possible, get to the head of the pack.
If there is a race to become a green finance hub, Ireland is very much in it to win it. From the Central Bank, via the Ireland Strategic Investment Fund (ISIF), sovereign green bond issuance, and the government-backed Sustainable Nation Ireland initiative, the country is starting to fire on all cylinders.
Buoyed by a vibrant fund servicing sector and underpinned by a strong government commitment to the sustainable agenda, there are definite “green shoots” appearing.
A government document outlining its International Financial Services (IFS) strategy has the development of a national roadmap to support sustainable finance as a priority. Also prioritised are a “deep sector analysis” of future sustainable finance and responsible investment skills and talent requirements. The would also be a feasibility study into the development of a Sustainable Finance innovation programme. This all comes under the Year of Sustainable Finance 2019 (#yosf19).
But how deep do the sustainable roots go? Beyond the clear commitment from ISIF and others, it’s far from clear that true sustainable investment has penetrated too far at the ‘rank and file’ asset owner community – although that may be about to change with new European Union legislation in the pipeline.
But let’s start with the Central Bank, which in February made its clearest statement so far around climate change.
Governor Philip Lane, at a lecture in Galway, described the challenges posed by climate change for the Irish financial system.
“An increase in the frequency of severe weather events has implications for macroeconomic outcomes, asset prices, house prices, credit risks and the cost and coverage of insurance contracts.”
As for pension funds, he said that firms that offer defined-benefit pension plans “will have to address climate-related market risks”.
He went on: “Turning to the regulation and supervision of firms and markets, climate change poses several challenges. Financial firms (banks, insurance companies, pension funds and investment funds) have to work out the market risks and credit risks associated with climate change.”
He added the Central Bank will need to ensure that these financial stability risks are contained by improving the climate resilience of the financial system. And the bank would also have to ensure that financial firms incorporate climate change into strategic and financial plans.Such comments will be music to the ears of those promoting sustainability in the country: they provide a solid base on which to build. And it’s worth noting that Lane is moving on to become Chief Economist at the European Central Bank – helping to turn that august body a little greener in every sense…
And of course another milestone was the Fossil Fuel Act 2018, which meant the country became – at the start of this year – the first in the world to divest its state investment assets from fossil fuels. It meant a divestment of 38 companies from ISIF and the development of an exclusion list of 148 fossil fuel companies like BP, Royal Dutch Shell, Chevron and Exxon.
In practice, though, it is unlikely to have much of a real-world impact given it just refers to €68m in assets and the fund is rather focusing on climate change in a more holistic way: making it one of its five priority areas as part of a revised investment strategy that will build on existing investments in renewable energy and carbon emission reduction to support Ireland’s transition to a low-carbon economy.
ISIF has also begun the process of measuring the carbon footprint of its investment portfolio as part of a wider approach to identify, manage and mitigate climate risk across its portfolio. It says its global equity and corporate bond portfolio outperform the global benchmarks for CO2 emissions, and the carbon emissions associated with the ISIF’s investment portfolio were “expected to decline substantially” after the divestment.
But beyond the ISIF, it can be difficult to detect asset owner sustainability.
Ireland’s nine signatories to the Principles for Responsible Investment includes just two asset owners: ISIF and University College Cork. In terms of total signatories, it sits between Iceland and Guernsey.
Part of the problem may be due to the highly fragmented nature of the pensions market. According to Jerry Moriarty, CEO of the Irish Association of Pension Funds (IAPF), of the c.70,000 schemes, some 60,000 have just one member.
While there are moves afoot to consolidate the system, the situation is likely to persist for the foreseeable future.
As Moriarty explains, ESG is “at an early stage” in Ireland compared with the Nordic, French and Dutch pension systems.
On the horizon is the revision of the EU pension fund directive, Institutions for Occupational Retirement Provision (IORP II). This contains ESG provisions for the first time, and Moriarty noted that trustees are going to have to start to take note of ESG, many for the first time.
So it will disappointing that an official briefing on IORP II for trustees produced last October by the regulator, the Pensions Authority, makes no mention of ESG. Nonetheless, the revised directive will definitely help to concentrate minds when it is transposed into Irish law.
But the IAPF has been vocal about the authorities’ lack of action in getting the directive into law. Moriarty has said it means schemes are not yet aware of the implications – let alone the ESG provisos.
Somewhat ironic, given that it was an Irish MEP, Brian Hayes, who was the ‘rapporteur’ for the directive.
The other big development in the works is a government plan to introduce automatic enrolment in a bid to bring an estimated 410,000 people into defined contribution (DC) pension schemes for the first time.
One inspiration is the UK’s NEST, which is namechecked in the government proposal.
Moriarty said the IAPF has had input from NEST’s Chief Investment Officer Mark Fawcett. Fawcett has been involved in developments such as the UBS climate aware fund so it is to be hoped that some of this ESG DNA gets included somehow, although the government proposal as it stands has no mention of ESG.
Brexit, now just days away, will have an impact in some form or other. What is clear is that it has seen an influx of asset managers shifting assets (if not their portfolio managers and ESG specialists) to Ireland.
Of course, some of the ‘indigenous’ managers DO have ESG at their core. KBI Global Investors, for one, recently extended its range of Responsible Investing strategies and announced the introduction of fossil fuel free versions of its Global, Eurozone and Emerging Markets equity funds.Overarching all these efforts is a body called Sustainable Nation Ireland (SNI), which has declared 2019 the Year of Sustainable Finance – launched by Minister of State for financial services and pensions, Michael D’Arcy.
SNI’s job is to promote Ireland as a leading hub for sustainable finance and accelerating our transition to a low carbon economy. It was formed in 2015 with the merger of Ireland’s Green International Financial Services Centre (Green IFSC) and The Green Way, which led Dublin’s cleantech cluster.
It runs events such as Climate Week and the Climate-KIC Climate Innovation Summit, which featured State Street’s ‘Fearless Girl’.
There is much talk about using Ireland’s leading role in the aviation leasing market, seen as an Irish economic success story, upon which to build a sustainable finance industry – though how the two are compatible is perhaps less considered.
Perhaps the last word should go to a former Irish President.
Mary Robinson is the former United Nations High Commissioner for Human Rights whose work now focuses on climate justice.
Launching Trinity College Dublin’s Green Week recently she called on the Irish population to “get angry” with political institutions not doing enough to tackle climate change.
And she supported a student fossil fuel divestment campaign. “The students are being very active. I love it.”