SFDR
Navigating through impact investing promises of SDG funds
On 1 February 2024, ESMA published its risk analysis on impact investing. Impact investing is a component of ESG investments but remains different in terms of legal framework. While there is no standardised definition, ‘impact investing’, which can be characterised by investments aimed at generating positive social and environmental outcomes alongside financial returns and surpassing traditional ESG criteria, has garnered significant attention from investors.
However, amidst this growing interest, concerns about greenwashing and the accuracy of impact claims have emerged. Hence, ESMA has examined 84 SDG funds, aiming to assess whether they effectively fulfil their promises in impact investing, particularly in advancing the United Nations Sustainable Development Goals (SDG).
Key findings from the ESMA study reveal that SDG funds generally demonstrate superior sustainability ratings compared to non-SDG funds. However, ESMA suggests that while these investment funds may excel in terms of sustainability criteria, their actual impact on advancing the SDGs is often limited. This highlights a significant gap between the intentions and outcomes of SDG-focused investment strategies.
Despite the overarching aim of contributing to sustainable development, ESMA suggests that many SDG funds lack a clear focus on impactful investments that directly address the SDGs.
Furthermore, ESMA emphasises the importance of transparency and accountability in reporting the impact of SDG funds with investment funds’ documents, namely key investor information documents (KIID), investment strategy extracted from prospectuses and investment funds’ name, which provide information on the funds’ strategy and if/how alignment with the SDGs is ensured. It argues that greater transparency is necessary to accurately assess the effectiveness of these investment funds in achieving their stated objectives.
Overall, ESMA underscores the potential of SDG funds to drive positive change towards achieving global sustainability goals. However, it also highlights the importance of addressing existing challenges such as alignment with the SDGs and transparency in impact reporting to fully realise the promise of impact investing in advancing sustainable development.
CSSF’s priorities on integration of sustainability and adequate consideration of sustainability risks
On 22 March 2024, the CSSF released an updated overview of its supervisory priorities in sustainable finance in a communication (the “Communication”). As the regulatory authority supervising the financial sector, the CSSF aims to actively support the transition towards sustainable finance practices among financial institutions. In the Communication, the CSSF emphasises the long-term objective of integrating sustainability considerations and risks into financial strategies across the financial sector. To this end, the CSSF defines supervisory priorities with a view to promoting consistent implementation of sustainable finance frameworks and integrating ESG factors into its supervisory practices.
While recognising the primary responsibility of supervised entities and their board members for compliance, the CSSF stresses the importance of integrating ESG factors into traditional governance, risk management and compliance structures.
With regard to assets management industry, the CSSF underlines its commitment to monitoring compliance with sustainability provisions such as SFDR, RTS and the Taxonomy Regulation. The CSSF will incorporate all new regulatory advancements concerning SFDR into its supervisory strategy.
Following a risk-based methodology, the CSSF will concentrate on these priority domains:
(i) Organisational arrangements of IFMs, including the integration of sustainability risks by financial market participants;
(ii) Verification of the compliance of pre-contractual and periodic disclosures;
(iii) Verification of the consistency of information in fund documentation and marketing material;
(iv) Verification of the compliance of product website disclosures, and
(v) Portfolio analysis.