SFDR
CSSF digital collection of sustainable risks to be considered by AIFMs
On 27 July 2022, the CSSF issued a first communication on regulatory requirements regarding the SFDR and the entry into force of the SFDR RTS on 1 January 2023 with the intention to set up a specific data collection relating to SFDR precontractual documents and periodic reports.
Finally launched on 1 February 2023, via a second CSSF communication and by means of a questionnaire, this exercise seeks to digitally gather SFDR data in relation to the integration of sustainability risks with emphasis on IFM organisational structures, classified as financial market participants (FMPs) or financial advisors (FA) in accordance with SFDR RTS applying as from 1 January 2023 notably in terms of human resources and governance, the investment decision or advice process, the remuneration and risk management policies and the management of conflicts of interest.
Authorised AIFMs should have completed the dedicated questionnaire via eDesk module “SFDR-IFM disclosures” by 2 March 2023.
Complementary delegated act amending SFDR RTS level 2 on fossil gas and nuclear activities published (Article 8 and 9 of SFDR)
On 1 January 2023, the Complementary Delegated Act entered into force (the “CDA”). As may be recalled, it extended the framework of the Taxonomy Regulation with the aim to boost green investments and prevent ‘greenwashing’ by providing investors with guidance on economic activities that can be considered environmentally sustainable. To achieve this objective, the Council of the European Union and European Parliament worked on Level 2 measures under the Taxonomy Regulation (the “SFDR RTS Level 2”). Nevertheless, political differences between Member States led to the decision to deal with the issue of gas or nuclear activities separately.
After long debate, the final CDA provides templates to be annexed to the SFDR RTS Level 2 concerning the pre-contractual disclosures, the publications to be made on websites and the information to mention in periodic reports.
As per the ESAs' recommendation, a graph has now been included to illustrate the extent to which certain exposed portfolios comply with EU Taxonomy requirements for gas and nuclear-related activities.
Since the three-month scrutiny period of the European Commission ended on 31 January 2023, the final text has been published to the Official Journal and entered into force on 20 February 2023.
New CSSF communication in relation to the publication of SFDR RTS Level 2 on fossil gas and nuclear activities (Article 8 and 9 of SFDR)
On 8 March 2023, the CSSF reminded in a communication to FMPs the entry into force on 20 February 2023 of the SFDR RTS Level 2 in relation to pre-contractual and periodic transparency requirements and Taxonomy-aligned fossil gas and nuclear energy related activities for financial products disclosing under Article 8 and Article 9 SFDR (“SFDR RTS Level 2”).
With respect to the pre-contractual documents, the CSSF informed that the FMPs shall present the pre-contractual disclosure information in the format of the templates laid down in the annexes of the SFDR RTS Level 2 in the following cases:
- when the investment funds they manage are launched after 20 February 2023; and
- in relation to existing investment funds for which changes are introduced in the prospectus/issuing document after 20 February 2023.
As announced in the CSSF communication dated 27 July 2022, if changes to the issuing documents are limited to the use of the new SFDR RTS Level 2 templates, FMPs must confirm in their application to the CSSF (i) the use of new templates and (ii) that no other changes have been performed.
With respect to the periodic reports, the CSSF further states that FMPs must present the periodic disclosure information in the format of the templates set out in the annexes of the SFDR RTS Level 2 for annual reports of investment funds issued after 20 February 2023 (irrespective of the financial year-end of the investment funds).
As a result, the AIFM are required to use the mandatory templates annexed to the issuing documents as well as the template of periodic report, to comply with the disclosure requirements laid down in the SFDR and SFDR RTS Level 2. Moreover, authorised AIFMs shall ensure that the annual reports of the managed AIFs based in another jurisdiction than Luxembourg comply also with the above-mentioned periodic disclosure obligation.
Updated CSSF FAQ on SFDR, clarifying ESG Terminology and Sustainable Investments
On 2 December 2022, the CSSF issued a FAQ on SFDR (the “FAQ”) providing additional information and clarifications on various aspects of the SFDR, including updates to prospectuses and issuing documents, website disclosures, pre-contractual disclosures, and periodic disclosures. It is noted that the FAQ should be read in conjunction with the Q&As issued by the European Commission on 14 July 2021 and on 25 May 2022, clarifications brought by the ESA and the various CSSF communications.
On 13 March 2023, the CSSF updated the FAQ with three additional questions (Q7, Q8 and Q9). In the first new question it is reminded that in accordance with the ESMA Consultation Paper and to prevent any greenwashing and avoid misleading, ESG terminology in investment funds’ name such as “ESG”, “green”, “sustainable”, “social”, “ethical”, “impact” must be supported in a material way, by evidence of sustainability characteristics, themes, or objectives.
The CSSF also clarifies the methodology to define ‘sustainable investments’ within the meaning of Article 2(17) of the SFDR as an investment in an investee company which has one economic activity, among several other economic activities, that contributes to an environmental or social objective.
In addition, the CSSF expects that the thresholds of investment for Article 8 and Article 9 of the SFDR are disclosed by the FMPs to investors, through appropriate means (such as mandatory disclosure templates, prospectuses, issuing documents or website disclosures…).
Finally, the FAQ also clarified that for investment funds disclosing under Article 9 SFDR, the CSSF expects efficient portfolio management techniques for hedging purposes to be used only in the "remaining portion" of the investment portfolio.
SMSG advice to ESMA on greenwashing impact on funds industry and the declining number of Article 9 funds
On 16 March 2023, the Securities and Markets Stakeholder Group (SMSG) published advice submitted to ESMA on greenwashing interrogation.
The first advice is to create an universal definition of ‘greenwashing’ by aligning the definition of greenwashing with the definitions provided in the recitals of some EU regulations and engaging in concrete standards and propose the following definition: “the practice of misleading investors, notably (but not limited to) in the context of gaining an unfair competitive advantage, by making an unsubstantiated ESG claim about a financial product or service". The SMSG believes that the question how materiality of a potential breach will be assessed, depends on the angle taken/applicable legislation.
On ’greenbleaching’ (the phenomenon that investment fund managers invest in sustainable activities but refrain from claiming so to avoid the related legal risks) the SMSG mentioned that failure to disclose sustainability cannot be deemed "misrepresentation" and should not be sanctioned, as long as there are no legal requirements in that respect.
Then, regarding the declining number of investment funds disclosing under Article 9 SFDR, the SMSG highlighted that the lack of clarity on the definition a sustainable investment brings uncertainties for investment that has sustainable investment as its objective. The SMSG calls for ESMA to have a close monitoring on the investment funds industry and flag potential issues to the European Commission if necessary.
The SMSG has set up a working group to contribute further.
CSSF SFDR data collection on authorised and registered AIFM
On 24 March 2023, the CSSF published a communication for the launch of SFDR data collection requiring IFMs qualifying as FMPs to include sustainability-related information in the precontractual disclosures of financial products in accordance with SFDR, TR and the SFDR RTS.
The CSSF expects that EU-authorised AIFMs (in respect to all Luxembourg-domiciled regulated AIFs, as well as Luxembourg-domiciled unregulated AIFs qualifying as ELTIFs they manage), Luxembourg-authorised AIFMs (in respect to all Luxembourg-domiciled regulated AIFs, as well as Luxembourg-domiciled unregulated AIFs they manage) and registered AIFMs (in relation to all Luxembourg-domiciled regulated AIFs they manage) to provide information relating to precontractual product disclosures by 15 June 2023.
The reporting of SFDR data to the CSSF is compulsory for all sub-funds of an AIF regardless of the applicable regime (Article 6, Article 8 or Article 9 of the SFDR). The FMPs will remain responsible for updating the information provided further to the initial declaration by submitting subsequent declarations.