Following the entry into force of various texts amending the sustainability-related Luxembourg legislative and regulatory framework, the CSSF conducted various supervisory actions, as part of the implementation of its Supervisory Priorities in the Area of Sustainable Finance, taking into account the ESMA Supervisory briefing on Sustainability Risks and Disclosures.
The main observations of the CSSF in the context of these supervisory actions were published in the CSSF Thematic Review on the Implementation of Sustainability-Related Provisions. The key takeways for the funds industry are summarised below.
1. Organisational arrangements of investment fund managers ("IFMs"), including the integration of sustainability risks by IFMs
a. Delegation to third parties
It is stated, even in case of delegation to third parties of any function, IFMs remain responsible for complying with sustainability-related obligations applicable to them (as per Article 110(2) of the 2010 Law and Article 18(3) of the 2013 Law). The latter includes, among others, disclosure requirements on fund documentation under Article 10 SFDR, to be made by IFMs either directly on their websites or another website such as the fund's or the delegated third parties' own websites (provided a mandatory cross-reference from the IFMs' websites is done). IFMs are also expected to ensure that initial due diligence performed on delegated third parties take into account sustainability-related obligations, which implies for funds disclosing under Article 8 and 9 of SFDR, that IFMs obtain delegated portfolio managers' methodology or model used to embed sustainability-related provisions in their investment due diligence. Besides, IFMs shall ensure that they key performance indicators ("KPIs") on sustainability provided to them by the delegated PMs are comprehensive, complete and established at appropriate frequency.
b. Risk management framework
As part of the risk management obligations of IFMs (as per Article 43(1) of CSSF Regulation No 10-4 and Article 40(2) of Commission Delegated Regulation (EU) 231/2013), all sustainability risks which could cause an actual or a potential material negative impact on the value of an investment of a fund (including funds not disclosing under Article 8 or 9 of SFDR) should be addressed and covered as part of IFMs' risk management and internal governance processes. This entails the establishment, implementation and maintaining of the identification and management of the relevant sustainability-related risks for each fund, notably, through, the reflection of those risks in the fund's risk profile, its risk limitation system, its reporting to the senior management and board of directors, as well as the implementation of sustainability-related stress tests and scenario analyses. Adequate checks and controls should also be in place at the level of IFMs to ensure the ongoing compliance with sustainability-related investment restrictions provided for in the precontractual disclosures.
c. Compliance of IFMs providing portfolio management and investment advisory services with sustainability-related provisions
It is reminded that IFMs providing the investment services of discretionary portfolio management and investment advice are required to comply at all time with the disclosure obligations on the integration of sustainability risks applicable in the context of these activities.
d. Statement by IFMs that they do consider PAI of their investment decisions on sustainability factors
It is important to note that, where IFMs consider principal adverse impacts ("PAI"), they shall publish a statement complying with the standards set out in the SFDR RTS, by 30 June each year, for the period covering 1 January to 31 December of the preceding year (except for the first publication), on their website, in a section titled "Statement on principal adverse impacts of investment decisions on sustainability factors", in the website section "Sustainability-related disclosures" (as per Article 4 of the SFDR RTS).
2. Compliance of precontractual disclosures, including product website disclosures
a. Precontractual disclosures
i) Disclosure of environmental/social characteristics or sustainable objectives
The CSSF further emphasises that, SFDR-related required information should be provided in a manner that is easily accessible, non-discriminatory, prominent, simple, concise, comprehensible, fair, clear and not misleading for investors (as per Article 2 of the SFDR RTS), which entails that IFMs provide sufficient details regarding the environmental/social characteristics or sustainable objectives pursued by a given fund, in way that is not too general, but at the same time, in a clearly enough and sufficiently explained manner, so as to permit investors to understand the characteristics or objectives of offered to them.
ii) Fund names
As part of the general requirement to provide information that is fair, clear and not misleading, the CSSF reminds that funds' names (including funds disclosing under Article 6, 8 or 9 under SFDR) should be aligned, first, with the funds' investment objectives and policies (as per question 7 of the CSSF FAQ on SFDR), and second, should comply with the ESMA Supervisory briefing on Sustainability Risks and Disclosures (regarding the use of terms such as "ESG", "green", "sustainable"," social", "ethical", "impact" or any other ESG-related terms).
iii) Definition of sustainable investment
It has been clarified (in the EC Q&A on SFDR and SFDR Delegated Regulation) that, SFDR does not prescribe a single metholodology to account for sustainable investments, nor sets out minimum requirements for qualifying concepts such as contribution, do no significant harm, or good governance (i.e. the key parameters of a sustainable investment).
However, the CSSF expects IFMs to carry out their own assessment for each investment, and, disclose, as part of the precontractual disclosures and/or product website disclosures under Article 10 of SFDR, their underlying assumptions, with their methdology, including how they determine the contribution of the investments to environmental or social objectives, how investments do not cause significant harm to any environmental or social investment objective and how investee companies meet the "good governance practices" requirement, in a sufficiently detailed and easily accessible manner.
iv) Fund asset allocation
It is highlighted that the CSSF expects asset allocation disclosures to be aligned and comprehensive with regards to the environmental/social characteristics promoted by the fund or the sustainable investment objective pursued by the fund.
v) Consideration of PAI at financial product level
Where PAI on sustainability factors are considered at the fund level, in accordance with Article 7 of SFDR, the CSSF states thatthe information should relate to the fund (not be made at the entity level), and be relevant and sufficiently detailed, including with references to the procedures in place to mitigate those impacts.
b. Product website disclosure
As per Article 10 of SFDR and Articles 23 to 49 of SFDR RTS, information to be published on IFMs' websites for each fund disclosing under Article 8 or 9 of SFDR, in a separate section titled "Sustainability-related disclosures", in the same part of their website as the other information relating to the fund, shall, both, be clearly identified as being made in relation to the fund in question and prominently display the environmental/social characteristics or the sustainable investment of the fund in question.
i) Easily accessible disclosures
The CSSF emphasizes that, IFMs should ensure the easy and straightforward access of investors, (especially retail investors) to the abovementioned website precontractual disclosures, in accordance with Article 2 SFDR RTS.
ii) "Summary", "data sources and processing", "limitations to methodologies and data" and "engagement policies' website sections
For the summary section, it is expected that a summary of the information contained in the different sections of the website (as per Articles 25 and 38 of SFDR RTS)and that summary shall have a maximum length of two sides of A4 page size.
For the data source and processing section, information should, in the CSSF's view, be provided, in a clear (for example, in a tabular form), comprehensive, relevant and sufficiently detailed way in plain language with content on the data sources used to attain the sustainable investment objective of the financial product or to attain each of the environmental or social characteristics promoted by the financial product the measures taken to ensure data quality, the way data are processed and the proportion of data estimated (as per Articles 32 and 45 of the SFDR RTS).
For the limitations to methodologies and data section, it is expected that IFMs should to describe any limitations to the methodologies and the data sources used and how such limitations do not affect how the environmental/social characteristics promoted by the financial product are met or why such limitations do not affect the attainment of the sustainable investment objective in a relevant and sufficiently detailed way, while avoiding technical jargon, preferably with illustrative or concrete examples (as per Articles 33 and 46 of the SFDR RTS) .
For the engagement policies website section, where engagement is part of the environmental or social investment strategy or the sustainable investment objective IFMs shall describe the engagement policies implemented, including the way engagement is part of the investment strategy, in a relevant and sufficiently detailed way, in plain language (as per Articles 35 and 48 of the SFDR RTS).
3. Compliance of periodic disclosure information
As per Article 11 of SFDR and Articles 50 and 58 of SFDR RTS, specific disclosures shall be included in the periodic reports of funds disclosing under Article 8 or 9 of SFDR.
a. Content of the periodic disclosure
A prominent statement must be included in the main body of the annual report according to Articles 50 and 58 of the SFDR RTS).
The CSSF expects the periodic disclosure to present the performance of sustainability indicators used, to measure how, each of the environmental/social characteristics were met for funds disclosing under Article 8 of SFDR or the overall sustainability-related impact of the financial product by means of relevant sustainability indicators for funds disclosing under Article 9 of SFDR, respectively. With respect to these indicators, their limitations (if any) should be disclosed, as well as a quantitative assessment of the latter and (for internal indicators only) their methodology with the underlying assumptions according to Articles 51 and 59 of the SFDR RTS.
Where PAI are considered, the CSSF wants, for each fund, sufficiently detailed and relevant information on the PAI considered during the period, taking into account the qualitative and/or quantitative information in the precontractual disclosures (as per Articles 51 and 59 of the SFDR RTS).
As for the actions taken to meet the environmental and/or social characteristics during the reference period, for funds disclosing under Article 8 of SFDR, and for the actions taken to attain the sustainable investment objective during the reference period, for funds disclosing under Article 9 of SFDR, that IFM should disclosure for each fund information on the concrete actions and/or engagements in relation to the investments held during the period (as per Annex IV of the SFDR RTS).
b. Consistency of the periodic disclosure with precontractual disclosures
It is reminded that SFDR RTS requires that IFMs present for each fund disclosing under Article 8 or 9 of SFDR various sets of quantitative information (e.g. proportion of investments that attained the environmental/social characteristics during the period, proportion of sustainable investments during the period). It is also reminded that funds shall comply on an ongoing basis with all binding commitments of their respective investment strategy, as disclosed in their offering document/prospectus, including the precontractual disclosures (as per Annex IV and V of the SFDR RTS).
4. Fund documentation and marketing communication
a. Consistency of information in fund documentation and marketing communications
The CSSF expects sustainability-related information in marketing communications no to be limited to general descriptions, but be specific to the fund under consideration, to clearly reflect the claims made in the fund documentation and not contradict or diminish the significance of the information contained in the prospectus for UCITS or information disclosed to investors for AIFs (as per Article 13 of SFDR).
b. Presentation of disclosures in marketing communicationsIn line with the obligation to provide information required by SFDR in a manner that is easily accessible, non-discriminatory, prominent, simple, concise, comprehensible, fair, clear and not misleading pursuant to Article 2 SFDR RTS, it should be noted that, when IFMs refer to product credentials in their marketing communications, a clear reference to the entity having granted the credential is being made (such as ESG labels, ESG ratings or ESG certifications) and well as to the fund to and the date on which it has been granted.
With respect to hyperlinks in marketing communications, they should be limited, direct to the exact location where the relevant information may be found and maintained over time (as per point 28 of the ESMA Supervisory briefing on Sustainability Risks and Disclosures).
5. Portfolio analysis
In line with the point 47 of the ESMA Supervisory briefing on Sustainability Risks and Disclosures and EC QA on SFDR and SFDR Delegated Regulation, it should be noted that, the portfolio holdings of funds have to reflect the name, the investment objective, the strategy and the characteristics displayed in the documentation to investors and that, for funds disclosing under Article 9 of SFDR, the underlying assets in which they invest have to qualify as "sustainable investments" (to the exception of investments held for specific purposes). Ongoing compliance with these obligations should also be ensured by the IFMs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.