ESG

On 21 October 2024, the CSSF published Circular 24/863 adopting the ESMA guidelines on funds’ names using ESG or sustainability-related terms (the “Guidelines”) into its administrative practices and regulatory approach. The Guidelines are applicable as from 21 November 2024 and aim to promote consistency in fund naming practices across the EU and to enhance transparency and investor protection by specifying the circumstances where the funds’ names using environmental, social, and governance (“ESG”) or sustainability related terms are unfair, unclear, or misleading.

The Circular applies inter alia to alternative investment fund managers (AIFMs) including internally managed AIFs, EuVECA, EuSEF and ELTIF, which are required to carry out a self-assessment of the funds they manage and ensure compliance with the Guidelines, irrespective of whether they are subject to article 6, 8 or 9 SFDR.

Newly established funds must comply with the requirements provided in the Guidelines as from the date of their establishment, while existing funds have until 21 May 2025 to comply. The CSSF also stated that a priority processing procedure (“PPP”) has been put in place for existing UCITS and AIFs to update quickly their issuing documents or prospectuses solely to comply with the Guidelines. Eligible amendments are limited to sub-fund name changes or minor adjustments to ESG engagements or SFDR pre-contractual disclosures.

On 18 December 2024, the CSSF published a follow-up communiqué concerning ESMA series of Q&As which address key aspects of the practical application of the ESMA Guidelines on funds’ names using ESG or sustainability-related terms.

These Q&As provide clarifications on three key topics: green bonds [UCITS, AIF], the definitions of “meaningfully investing in sustainable investments” [UCITS, AIF], and controversial weapons [UCITS, AIF].

In the Q&A on green bonds, ESMA has specifically clarified that investment restrictions do not apply to investments in European Green Bonds, while for other green bonds, a look-through approach may be used to assess whether the activities financed may be excluded.

Regarding the Q&A on “meaningfully investing in sustainable investments”, ESMA indicated that funds using sustainability-related terms in their names and investing less than 50% of their portfolio in sustainable investments may not meet the threshold, although this percentage could vary depending on the specific case. National competent authorities are advised to conduct a case-by-case analysis to assess the usage of sustainability-related terms in fund names. It must also be noted that this threshold can be adjusted upwards depending on specific circumstances, reflecting the fund’s adherence to sustainability commitments and transparency standards.

Regarding the Q&A on controversial weapons, ESMA has specified that the reference to the exclusion relating to controversial weapons should align with SFDR principal adverse impact indicator 14.

On 30 October 2024, ESAs released the annual report under Article 18 SFDR. The report evaluates Principal Adverse Impact (“PAI”) disclosures under SFDR made by Financial Market Participants (“FMPs”) for the reporting period running from 1 January 2022 to 31 December 2022.

The PAI entity-level disclosures are only mandatory for FMPs with more than 500 employees. Smaller FMPs can explain why they do not consider PAIs or may resolve to disclose on their PAIs.

In a nutshell, the report highlights improvements, identifies shortcomings, and provides recommendations to enhance transparency and compliance with sustainability-related disclosure obligations.

The report notes a market improvement in the quality and accessibility of disclosures compared to previous years. Larger FMPs, particularly those belonging to multinational groups, exhibited higher compliance levels due to access to better resources and methodologies. However, smaller FMPs often struggled, citing lack of data and limited resources as obstacles. Some disclosures remain incomplete, with vague explanations and non-compliance with mandatory templates.

ESAs highlight ongoing challenges in disclosing mandatory indicators, including greenhouse gas emissions, biodiversity impacts, and gender pay gaps. Therefore, there are yet improvements to be made at the level of compliance with SFDR provisions.

The assessment identifies on one hand, good practices, such as clearly structured and navigable disclosures made available on dedicated sustainability sections of FMP websites, alongside the use of introductory explanations and adherence to SFDR templates. On the other hand, poor practice included unclear language, technical jargon, and inadequate data reporting. Some FMPs failed to meet mandatory requirements, particularly regarding the use of PAI indicators. The report also stresses the need for improved data quality and calls on FMPs to address data gaps proactively.

In terms of Paris Agreement, ESAs recognised limited progress. Few FMPs provided measurable, quantitative targets or outlined clear methodologies for achieving net-zero commitments. The lack of standardisation in target-setting across the sector remains a concern.

The ESAs recommendations include enhancing supervisory guidance for National Competent Authorities (the “NCAs”), revisiting templates to reduce ambiguity, and considering revisions to PAI disclosure requirements to better align with the diverse profiles of FMPs and ensure consistency throughout.

The report serves as a critical assessment tool providing an explanation and serving as a ‘guide’ for improving the effectiveness, transparency, and reliability of sustainability disclosures under the SFDR. Moving forward, continued collaboration between regulators, industry participants, and data providers will be necessary to ensure progress in sustainability reporting.

On 15 October 2024, the CSSF imposed an administrative fine of EUR 56,500 on a Luxembourg investment fund manager for failing to have sound administrative procedures and adequate internal control mechanisms and to comply with rules of conduct.

The breaches, which relate to five sub-funds classified under Article 8 SFDR, were identified during a thematic on-site inspection of the fund manager focusing on ESG aspects.

On 29 November 2024, the Commission published a draft notice which provides clarification on the interpretation of the EU Taxonomy Environmental Delegated Act, the EU Taxonomy Climate Delegated Act and the EU Taxonomy Disclosures Delegated Act. These acts collectively establish a classification framework for sustainable economic activities, ensuring transparency for investors and financial actors.

The purpose of the Commission through this notice is to address technical questions and provide guidance on specific legal provisions and the technical screening criteria (“TSC”) that determine whether economic activities qualify as environmentally sustainable.

The notice addresses questions regarding how activities can substantially contribute to objectives such as climate change mitigation, adaptation, and the sustainable use of water and marine resources while doing no significant harm (“DNSH”) to other objectives. It provides clarification regarding the technical screening criteria, implementation challenges, and compliance strategies. It covers clarifications on DNSH criteria, life-cycle greenhouse gas emission assessments, verification requirements, and the scope of eligible activities.

The notice emphasises the importance of consistency with broader EU environmental legislation and frameworks, such as the SFDR and the Corporate Sustainability Reporting Directive (“CSRD”).

The Commission further highlights efforts to simplify reporting requirements, improve the usability of TSC, and provide digital tools and technical support for stakeholders. It underscores the EU's commitment to aligning sustainable finance practices with environmental goals and scaling up green investments by offering a clear and uniform regulatory framework. However, it stresses that the interpretations provided are not legally binding and do not replace authoritative rulings by the Court of Justice of the European Union.

On 8 November 2024, the European Commission issued a notice clarifying the interpretation and implementation of the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation. This act mandates financial and non-financial undertakings to report on the alignment of their activities with the Taxonomy’s sustainability criteria.

The notice provides detailed guidance on calculating and reporting Key Performance Indicators (“KPIs”), including the Green Asset Ratio (“GAR”), for financial undertakings such as asset managers and investment firms.

Financial undertakings must calculate turnover-based and CapEx-based KPIs using data from counterparties or investee companies. It further specifies how parent companies must consolidate disclosures across all subsidiaries and integrate Taxonomy-related KPIs at the group level. Additionally, the notice provides guidance on the evaluating exposures to entities like special purpose vehicles, SMEs, non-EU entities, and public authorities, real estate assets, addressing challenges where counterparties lack detailed Taxonomy disclosures. Furthermore, a particular emphasis is placed on the methodologies used for calculating KPIs, promoting not only consistency, inclusion of environmental bonds but also voluntary reporting of additional alignment estimates.

This notice promotes uniform application of the Disclosures Delegated Act, supporting the EU’s efforts concerning sustainable investments while fostering greater clarity for stakeholders.