ESG

On 26 February 2025, the European Commission (“European Commission”) proposed Omnibus I and Omnibus II, two legislative packages aimed at enhancing investment mechanisms and simplifying regulatory requirements within the EU.

Omnibus I addresses the postponement of certain sustainability reporting and due diligence obligations under the corporate sustainability reporting directive (“CSRD”) and the corporate sustainability due diligence directive (“CSDDD”). The proposal responds to concerns from businesses and policymakers about the compliance burden and administrative complexity of sustainability regulations, particularly for SMEs. The new directive delays the entry into force of certain CSRD and CSDDD provisions by up to two years, preventing unnecessary compliance costs for businesses that may later be exempt due to upcoming regulatory revisions proposed in Omnibus I. The CSRD, which mandates sustainability reporting for large EU companies, originally required large non-public interest entities to report in 2026 and listed SMEs in 2027. Under Omnibus I, these obligations would now apply in 2028 and 2029, respectively. Additionally, the European Commission proposed to exclude SMEs from CSRD’s scope and instead allow them to report on a voluntary basis. Similarly, the CSDDD, which requires companies to assess human rights and environmental risks in their supply chains, will see its first phase postponed from 2027 to 2028, with full implementation now set for 2030 instead of 2029. The initiative aligns with the EU’s broader push for regulatory simplification, responding to concerns raised in the Budapest declaration on competitiveness. The delay allows businesses to better prepare for compliance while reducing administrative costs, ensuring that sustainability reporting remains effective without stifling economic growth. The European Commission will continue working on further simplifications, ensuring that EU sustainability regulations remain practical and proportionate.

Omnibus II focuses on increasing the efficiency of the EU guarantee under InvestEU and simplifying reporting requirements. The proposal seeks to enhance investment mechanisms within the Union while reducing the administrative burden for businesses. The European Commission emphasises the role of InvestEU, a major risk-sharing instrument, in mobilising private and public investments. As of June 2024, InvestEU has mobilised EUR 280 billion, with nearly 70% from the private sector. The new amendments will increase the EU guarantee by EUR 2.5 billion, unlocking an additional EUR 25 billion in investments. The adjustments also introduce simplified reporting requirements, aligning with the EU's goal of reducing regulatory burdens by 25% for businesses and 35% for SMEs. The legislative package proposes better use of financial reflows from legacy programs like the European Fund for Strategic Investments (“EFSI”), enabling InvestEU to continue financing strategic sectors such as clean technology, digital innovation, and defence industrial policy. The initiative also streamlines funding mechanisms for Member States, allowing them to contribute to InvestEU via financial instruments rather than just through the EU guarantee. The European Commission sees Omnibus I as a crucial step in securing EU competitiveness and ensuring financial instruments remain flexible and efficient while maintaining strong oversight and risk mitigation. These measures are expected to strengthen economic resilience, ensuring the EU remains an attractive destination for investment.

The European Commission has also published a Q&A in light of the Omnibus legislative packages.

On 24 January 2025, CSSF issued a communiqué addressing investment fund managers subject to Circular CSSF 18/698 (“IFMs”) (excluding Luxembourg branches of investment fund managers under Chapter 17 of the revised Law of 17 December 2010 on undertakings for collective investment), as well as registered alternative investment fund managers as per Article 3(2) of the revised Law of 12 July 2013 on alternative investment fund managers, and their approved statutory auditors (Réviseurs d’Entreprises Agréés - REA).

The CSSF highlights the entry into force of the Corporate Sustainability Reporting Directive (“CSRD”) and the European sustainability reporting standards (“ESRS”). The CSRD's first phased approach began on 1 January 2024, with the first sustainability reports expected in 2025. These reports will be published in the management report and verified by a REA.

Entities potentially in scope are urged to determine whether they are subject to the CSRD and consult their REA. The CSRD applies to the below Luxembourg legal types listed in the accounting directive, with large undertakings required to disclose sustainability reports starting from the financial year beginning on or after 1 January 2025:

• SA, SCA and SARL;
• SENC and SCS, where all of the direct or indirect partners that have unlimited liability in fact have limited liability (such as an SCS whose general partner is organised as an SARL).

The Grand-ducal Regulation of 25 October 2024, increased the size criteria for categorising undertakings and groups by 25% due to inflation. Large undertakings are now defined as those exceeding at least two of three criteria for two consecutive financial years.

Exemptions may apply to non-listed subsidiaries in the European economic area included in their parent undertaking's sustainability report.

On 28 January 2025, the association of the Luxembourg fund industry (“ALFI”) published the European sustainable investment funds study 2024, highlighting that sustainable investment funds have gained traction as investors seek to align their financial goals with social and environmental concerns. In Europe, this trend has been encouraged by regulatory developments, with sustainable funds reaching 19% of total assets of European funds by the end of 2023, compared to 6% in 2019.

Global Context

Europe leads in sustainable investment funds, holding 85% of the global EUR 2.6 trillion in sustainable net assets by the end of 2023. North America and the Asia & Pacific regions hold 11% and 3% of global sustainable net assets, respectively. Sustainable funds account for 19% of the investment fund market in Europe, but only 1% in North America and 2% in the Asia & Pacific region.

European Landscape

The European sustainable funds segment has grown from less than EUR 1 trillion at the end of 2019 to EUR 2.2 trillion (out of the aforementioned global EUR 2.6 trillion) at the end of 2023. Sustainable funds’ net assets grew by 20.2% in 2023, while conventional funds’ assets have grown at a 0.9% rate since 2019, reaching EUR 8.8 trillion by the end of 2023. The launch of new funds across Europe experienced a downturn, with fewer than 2,000 launched in 2023, including 350 sustainable funds. The average fund size of European sustainable products increased from EUR 299 million in 2019 to EUR 416 million in 2023.

Fund Domiciles

Luxembourg is the largest European hub for sustainable investment funds, hosting 34% of sustainable funds’ net assets, with a growth of 14.1% in 2023. Ireland ranks second, with 16% of sustainable net assets and a significant share of passive investment strategy funds. France accounts for 11% of sustainable net assets, with a growth of 12.7% in 2023, despite slightly negative net flows. The top five fund domiciles, including the UK and Switzerland, hosted 80% of net assets by the end of 2023.

Investment Managers

The sustainable funds landscape in Europe is concentrated, with the top 5 investment managers holding 26% of total net assets. Investment managers are predominantly located in Luxembourg (27%), France (15%), Ireland (13%), the UK (12%), and Switzerland (8%), together accounting for over 75% of total net assets of European sustainable funds by the end of 2023.

SFDR Classification

At the end of 2023, funds classified as Article 8 and Article 9 represented 58% and 4% respectively of total assets of European funds in scope of the Sustainable Finance Disclosure Regulation (“SFDR”). Article 9 funds saw EUR 2 billion in net inflows, while Article 8 funds experienced EUR 82 billion in net outflows. There was a shift towards Article 6 funds, with 718 new funds launched in 2023.

Impact Funds

Impact funds, aiming for long-term societal and environmental benefits, accounted for 18% of sustainable funds’ assets, reaching EUR 418 billion by the end of 2023. However, impact funds’ cumulative net assets decreased by 2.2% in 2023, with EUR 5 billion in net outflows.

Alternative Investment Funds (“AIFs”)

AIFs have accounted for 4% to 7% of sustainable net assets since 2019, reaching EUR 120 billion by the end of 2023. Sustainable AIFs recorded positive net inflows of EUR 13 billion in 2023. AIFs are less affected by capital market fluctuations due to significant investments in alternative financial products.

Market Developments

2023 was a pivotal year for sustainable finance, with a record number of new sustainable finance policy measures and regulations adopted globally. Despite market downturns, sustainable assets have shown resilience in Europe. Luxembourg remains the largest hub for European sustainable funds.

Future Focus

Challenges remain in the consistent application and interpretation of the SFDR, leading to declassification of funds and investor uncertainty. Enhancing clarity and consistency in sustainable finance legislation and improving access to reliable, standardised data on investee companies are crucial for fostering sustainable investments.

On 10 February 2025, the law of 6 February 2025 (the “Law”) was published to support sustainable finance, aligning Luxembourg's financial regulatory framework with key EU regulations on European Green Bonds (“EuGB”).

The Law implemented Regulation (EU) 2023/2631, introducing uniform standards for labelling bonds as EuGB. Issuers using the EuGB designation must allocate bond proceeds to environmentally sustainable projects aligned with the EU Taxonomy. The CSSF is empowered to supervise compliance, ensuring issuers meet rigorous reporting and disclosure requirements.

Regulatory oversight is reinforced through enhanced CSSF powers, including access to documents, on-site inspections and the ability to impose sanctions such as fines and public reprimands.

On 14 February 2025, ESMA published its final report containing RTS and implementing technical standards (“ITS”) under the European Green Bonds Regulation (“EuGB Regulation”). These standards detail the requirements for the registration and ongoing supervision of external reviewers providing opinions on European Green Bonds.

The Regulation, which entered into force on 21 December 2023, tasks ESMA with developing standards to ensure the integrity, independence and competence of external reviewers. This final report consolidates the outcomes of ESMA’s public consultation conducted between March and June 2024, integrating stakeholder feedback, proportionality advice and cost-benefit considerations.

The RTS and ITS cover four principal areas:

1. the criteria to be assessed relating to senior management, board members and analytical resources;

2. the criteria to assess sound and prudent management, and management of conflicts of interest;

3. the criteria applicable to outsourcing of assessment activities;

4. the standard forms, templates and procedures for the provision of registration information.

Proportionality and Practical Adjustments: The standards have been revised to reduce administrative burdens, especially for smaller entities. Notably, the frequency of analysts’ suitability assessments was reduced to a biennial basis unless significant deviations are detected. Requirements for self-assessment and internal training frameworks have been retained but with greater flexibility and recognition of firm-level processes. Additionally, ESMA has merged some previously separate RTS (notably under Articles 23(6) and 28(1)) to streamline compliance.

External reviewers must implement comprehensive governance frameworks, including clear policies for conflict identification, internal control mechanisms and board-level oversight. While ESMA clarified that no ex-ante list of potential conflicts is required, it expects reviewers to document general scenarios and mitigation strategies.

In relation to outsourcing, ESMA emphasised that outsourcing cannot impair internal controls or ESMA’s ability to supervise compliance of external reviewers. Annual assessments are required, and safeguards especially for third-country providers must be in place. However, ESMA acknowledges that if no outsourcing occurs, no assessment needs to be performed. The ITS consolidates application requirements into a simplified structure, aiming for digital, machine-readable submissions. ESMA has withdrawn requirements deemed duplicative or overly detailed, such as those on affiliate services and changes to internal assessments. Some additions were made, including date and place of birth for senior personnel to align with ESAs' fit and proper assessments.

ESMA concluded that the standards do not introduce material new costs beyond those already established under Level 1. While minor compliance costs may arise, particularly for training, these are deemed proportionate to the benefits of enhanced investor protection, credibility and harmonisation of the green bond market. The final draft RTS and ITS have been submitted to the European Commission for adoption. Following the 18-month transition period, the technical standards would become binding for all external reviewers as from 21 June 2026.