1 Setting the Scene – Sources and Overvie

1.1 What are the main substantive ESG-related regulations?

The ESG framework in Luxembourg comprises a number of EU regulations, EU legislative measures amending existing regulatory frameworks, national legislation and regulatory guidance, including:

  1. Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (the "SFDR");
  2. Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing SFDR with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of 'do no significant harm', specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports (the "SFDR RTS");
  3. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the "Taxonomy Regulation");
  4. Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (the "Low Carbon Benchmark Regulation");
  5. five Commission Delegated Regulations and Commission Delegated Directives integrating sustainability issues and considerations into the following EU legislative regimes: (i) UCITS Directive 2009/65/EC, amended by Commission Delegated Directive (EU) 2021/1270; (ii) AIFMD 2011/61/ EU, amended by Commission Delegated Regulation (EU) 2021/1255; (iii) MiFID II 2014/65/EU, amended by Commission Delegated Regulation (EU) 2021/1253 and Commission Delegated Directive (EU) 2021/1269; (iv) Solvency II Directive 2009/138/EC, amended by Commission Delegated Regulation (EU) 2021/1256; and (v) Insurance Distribution Directive EU/2016/97, amended by Commission Delegated Regulation (EU) 2021/1257;
  6. the law of 23 July 2016 on the publication of non-financial information (the "2016 Law"), which transposed Directive 2014/95 of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups into Luxembourg law; and
  7. the Commission de Surveillance du Secteur Financier (the "CSSF") Circular 21/773 on the management of climate-related and environmental risks for all credit institutions designated as less significant institutions under the Single Supervisory Mechanism and to all branches of non-EU credit institutions.

1.2 What are the main ESG disclosure regulations?

 

The main ESG disclosure regulations are: (i) the 2016 Law, which requires certain large undertakings and groups to disclose information relating to environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters; (ii) the SFDR (together with the SFDR RTS, which provides technical detail and guidance on the required disclosure); (iii) the Taxonomy Regulation; and (iv) the Low Carbon Benchmark Regulation.

1.3 What voluntary ESG disclosures, beyond those required by law or regulation, are customary?

Voluntary disclosures beyond those required by law or regulation include the consideration of principal adverse impacts of investment decisions on sustainability factors. In addition, certain other ESG-related regulations have introduced voluntary disclosures; for example, the Low Carbon Benchmark Regulation has introduced two new categories of low-carbon benchmarks, namely: (i) a climate-transition benchmark; and (ii) a specialised benchmark that brings investment portfolios in line with the Paris Agreement regarding the goal to limit the global temperature increase. The categories are voluntary labels designed to assist investors who are looking to adopt a climate-conscious investment strategy. The Luxembourg Finance Labelling Agency ("LuxFLAG") promotes the raising of capital for sustainable investments by awarding a label to eligible investment vehicles on a voluntary basis. The categories that are covered include, among others, environment, ESG, climate finance and green bonds. Other voluntary ESG regimes include: (i) Principles for Responsible Investment; (ii) the Financial Stability Board's Task Force on Climate-related Financial Disclosures; (iii) the Global Reporting Initiative; (iv) the Sustainability Accounting Standards Board; (v) the Climate Disclosure Standards Board; (vi) the International Integrated Reporting Council; and (vii) CDP Global (formerly the Carbon Disclosure Project). The vast number of voluntary ESG regimes can pose challenges for companies incorporating and/or being evaluated by multiple frameworks, in particular as these are not always standardised, consistent and comparable in terms of scope, approaches to materiality and reporting standards.

1.4 Are there significant laws or regulations currently in the proposal process?

In addition to the ESG disclosure regulations noted above, there are several other legislative proposals in various stages of the EU's legislative process, and these include the EU Corporate Sustainability Due Diligence Directive, which aims to address human rights and environmental rights impacts in global value chains and foster responsible corporate behaviour, an EU Green Bond Standard (the "EU GBS"), the EU Ecolabel and guidelines on credit ratings and loan origination and monitoring.

1.5 What significant private sector initiatives relating to ESG are there?

There are a number of private-public initiatives relating to ESG. Two significant initiatives include: (i) the Luxembourg Sustainable Finance Initiative ("LSFI"); and (ii) LuxFLAG. LSFI is a not-forprofit association that designs and implements the Sustainable Finance Strategy for Luxembourg's financial centre. Its objective is to raise awareness, promote and help develop sustainable finance initiatives in Luxembourg. LuxFLAG is a non-profit organisation that aims to promote capital raising for sustainable investments by awarding a recognisable label (see above) to eligible investment vehicles. Its objective is to reassure investors that the labelled investment vehicles invest in the responsible investment sector. In addition to these ESG initiatives, there are also a number of ESG-related public sector initiatives. 

2 Principal Sources of ESG Pressure

2.1 What are the views and perspectives of investors and asset managers toward ESG, and how do they exert influence in support of those views?

Investors are increasingly looking to align their investment decisions with their personal priorities. They are now not only focused on financial returns but also on non-financial outcomes and are seeking to invest in companies that have the capabilities to both achieve and maintain strong financial and ESG performance. This increased investor interest in ESG reflects the growing recognition that performance and value can be enhanced by the inclusion of ESG metrics into companies' business operations and investment decisions.

As ESG has become an integral part of the conversation between asset managers and investors and with many institutional investors actively pursuing a sustainable and responsible investing agenda, asset managers are embracing ESG in order to align stakeholders' interests and avoid short-term investments and results, in return for long-term incentives aligning investment practices with social responsibilities and principles in order to meet investor demands. Investors are also recognising the potential for ESG factors to affect the valuation and performance of companies they invest in, and this has resulted in investors pressuring companies to increase the amount of information disclosed to investors on ESG-related matters.

2.2 What are the views of other stakeholders toward ESG, and how do they exert influence in support of those views?

ESG and sustainable finance is an area that is continuously evolving and growing to meet the expectations of a wide number of stakeholders, including shareholders, policymakers, regulators and central banks. Within the EU and Luxembourg, new regulatory frameworks are being introduced to address and support the European Commission's revised Action Plan on Sustainable Finance and the Renewed Sustainable Finance Strategy. This includes a number of regulations outlined above, including the Taxonomy Regulation, the SFDR, the Low Carbon Benchmark Regulation and the supporting secondary legislation with regard to the implementation of delegated acts. There are also a number of matters in progress, including the development of the EU GBS, the EU Ecolabel for financial products, and updating corporate financial reporting under the Corporate Sustainability Reporting Directive. This is in addition to the European Green Deal, the European Commission's plan to make the EU economy sustainable, which sets out an action plan to boost the efficient use of resources by moving to a clean, circular economy, restoring biodiversity and cutting pollution with the aim of the EU being climate neutral by 2050. This is in accordance with the European Climate Law, which turns the political commitment into a legal obligation. Furthermore, shareholders have placed increasing pressure on companies with respect to social and governance issues, including gender and racial diversity on boards, requiring companies to adopt policies and commit to enhanced disclosure with respect to ESG matters.

In addition, the CSSF, as the supervisory authority of the financial sector in Luxembourg, is committed to contributing to the achievement of the objectives of the Paris Agreement. For example, it became an official member of the network of greening the financial system ("NGFS") in 2019. NGFS's purpose is to help strengthen the global response required to meet the goals of the Paris Agreement and to enhance the role of the financial system in managing risks and mobilising capital for green and low-carbon investments in the broader context of environmentally sustainable development. Moreover, the Luxembourg Government has also launched several initiatives to promote innovative financial ideas to fight climate change.

2.3 What are the principal regulators with respect to ESG issues, and what issues are being pressed by those regulators?

The principal financial regulator in Luxembourg is the CSSF. The Environment Agency (Administration de l'environnement) is responsible for protecting the environment and the quality of the local living environment and may issue fines in certain circumstances.

More broadly within the EU, bodies such as the European Commission, the European Securities and Markets Authority ("ESMA"), the European Banking Authority, the European Insurance and Occupational Pensions Authority and the Technical Expert Group (the "TEG") are the principal regulators with respect to ESG issues. The key issues being pressed by these bodies are covered in the action plan on financing sustainable growth, which includes: (i) developing an EU classification system for environmentally sustainable economic activities; (ii) developing EU standards (such as the EU GBS) and labels for sustainable financial products (via Ecolabel) to protect the integrity and trust of the sustainable finance market; (iii) fostering investment in sustainable projects; (iv) incorporating sustainability in financial advice; (v) developing sustainability benchmarks; (vi) sustainability in research and ratings; (vii) disclosures by financial market participants; and (viii) sustainability in prudential requirements, strengthening sustainability disclosures by corporates and fostering sustainable corporate governance and promoting long-termism.

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Originally Published by Global Legal Group

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