ESG – Sustainable Finance Update

During the last quarter of 2022, several pieces of legislation and other guidance documents related to sustainable finance in the asset management industry have been published by national and European authorities.

Amongst these are:

Each of these documents are detailed below


On 2 December 2022, the CSSF published an FAQ on the Sustainable Finance Disclosure Regulation ("SFDR") covering the following areas:

  1. Updates of prospectus/issuing documents
  2. Website disclosures
  3. Pre-contractual disclosures
  4. Periodic disclosures

The CSSF clarifies in its FAQ that when the SFDR RTS1pre-contractual annexes are included in the prospectus/issuing document, any changes to this document are to be treated like any other changes to the prospectus and are subject to the CSSF's prior approval. Changes to the pre-contractual annexes may be considered as material (the CSSF mentions by way of example, changes to the binding elements and minimum commitment percentages) and as assessed by the CSSF on a case-by-case basis.

The CSSF makes it clear that the Luxembourg UCITS management company ("UCITS ManCo")/AIFM is responsible for the Article 10 SFDR website disclosures, irrespective of whether portfolio management has been delegated to a portfolio manager. The UCITS ManCo /AIFM will therefore have to ensure that all relevant disclosures are made on its website or on the website where fund-related documentation is usually made available to investors (such as the financial product's own website, the website of its initiator or that of the portfolio manager). This is to be welcomed as it provides flexibility and reflects current practice. However, the CSSF does require that cross-references are made from the UCITS ManCo's/the AIFM's website to the relevant website where all relevant information pursuant to Article 10 SFDR is made available.

As regards the disclosure of the minimum proportions of investments disclosed in the SFDR RTS pre-contractual annexes to meet the promoted E/S characteristics/the sustainable investment objective, the CSSF is of the view that these have to be considered as binding commitments of the investment strategy of the fund, with the result that ongoing compliance with the relevant minimum thresholds needs to be ensured. While this has not been expressly stated in the FAQ, the consequence of this is that not meeting the disclosed minima could result in passive or active investment breaches. Appropriate oversight and monitoring will need to be in place.

In respect of Article 9 SFDR funds, the CSSF is of the opinion that sustainable investments (as defined by Article 2 (17) SFDR and which may include taxonomy-aligned investments) need to meet the sustainable investment criteria from the date of the actual investment and on an ongoing basis during the life cycle of the fund. A more nuanced approach from the CSSF would have been desirable given the obvious difficulties for closed-ended funds to meet the requirement throughout the entire life-cycle of the fund and the fact that important clarifications on the qualification of a sustainable investment are still outstanding from the European Commission.

Moreover, the CSSF highlights the perceived risk of greenwashing in the context of exclusion policies. In this regard, the CSSF expects that funds disclosing under Article 8 SFDR provide a description of how the investment strategy allows meeting the E/S characteristics. If only an exclusion strategy is applied as part of the promoted E/S characteristics, the CSSF would expect disclosure of a detailed exclusion strategy to allow investors to understand how the fund's E/S characteristics are being met.  

2. ESAs' Q&A on the SFDR RTS

On 17 November 2022, the ESAs published a detailed Q&A in order to clarify some definitions and concepts used in the SFDR RTS. It also includes explanations on how financial market participants ("FMP") (i.e. including UCITS ManCos/AIFMs) should apply some provisions of SFDR.

The following extracts of the Q&A may be of particular interest to asset managers:

  1. 2.1 PAIs – delegation of investment management

The ESAs confirm that at financial product level (i.e. fund level), they expect the PAI disclosure to cover all investments of the product, irrespective of whether investment management has been delegated or not. At financial market participant level (e.g. UCITS ManCos and AIFMs), PAI reporting must include all investments, including those made by delegates, which therefore requires the FMP to ensure that it receives all information from the delegate to fulfil its PAI disclosure requirements under Article 4 (1)(a), 4 (3) and 4 (4) SFDR, as specified in Chapter II and Annex I of the SFDR RTS. This will have an impact on the reporting that will need to be put in place by FMPs with their delegates.

  1. 2.2 Removal of non-applicable sections from pre-contractual and period disclosure templates of the SFDR RTS

The ESAs confirm that sections in the pre-contractual and periodic disclosure templates that are not applicable to a specific financial product, may be removed provided that those sections are accompanied by a red text instruction that explicitly limits the scope of application of the section. The CSSF had so far insisted on all sections of the annexes being kept, even if not applicable, pending clarity from the ESAs on this point.

  1. 2.3 Good governance

The ESAs helpfully recall that SFDR is a disclosure regulation in the context of the Article 8 SFDR good governance disclosure and that therefore the use of reference metrics such as the UN Global Compact, the OECD or International Labour Law principles is not prescribed but could form part of a "policy to assess" the good governance practices of investee companies, including with respect to sound management structures, employee relations, remuneration of staff and tax compliance.

  1. 2.4 Article 9(3) SFDR – reduction of carbon emissions

The ESAs appear to go beyond a strict reading of Article 9 (3), which expressly refers to carbon emissions only, by stating that Article 9 (3) SFDR applies "when a financial product has a reduction of greenhouse gas (GHG) emissions as its objective as the SFDR intention is to cover all greenhouse gases and carbon emissions" (emphasis added). This wider interpretation could bring more Article 9 funds into the scope of Article 9 (3) SFDR.

  1. 2.5 Taxonomy-aligned investment disclosures

The ESAs also provide a number of clarifications around taxonomy-aligned investment disclosures. Amongst other things, the ESAs confirm that, where a fund invests in sustainable investments which meet the criteria of Article 2 (17) SFDR but not the criteria of Article 3 of the Taxonomy Regulation, the pre-contractual and periodic disclosure annexes should indicate 0% in the graphical representation in the section "To what minimum extent are sustainable investments with an environmental objective aligned with the EU Taxonomy?" and should in addition disclose a 100% share under the heading "What is the minimum share of sustainable investments with an environmental objective that are not aligned with the EU Taxonomy?".

The ESAs also make it clear that the pre-contractual disclosure on the minimum share of sustainable investments, including the extent to which the investments are in environmentally sustainable economic activities, is a commitment that should be met at all times and should be based on the actual investments the financial product. New financial products (or financial products that want to change their investment strategy) should disclose on the basis of "expected investments", which according to the ESAs can be considered the investable universe.

The Q&A contains a decision tree which provides guidance on the situations when taxonomy-aligned pre-contractual and periodic disclosures apply.

3. New RTS on nuclear energy and fossil gas investment disclosures under SFDR adopted by the European Commission

On 31 October 2022, the European Commission adopted the ESAs2'proposal for new Regulatory Technical Standards ("RTS") on the information to be provided in the pre-contractual, website and

in periodic disclosures about the exposure of financial products to investments in taxonomy-aligned fossil gas and nuclear energy activities. The reason for these new RTS is the entry into force of the Taxonomy Complementary Climate Delegated Act3on 1 January 2023, which will consider fossil gas and nuclear energy activities as being taxonomy-aligned if they meet certain conditions.

The new RTS will amend the existing SFDR RTS, including the template pre-contractual and periodic disclosure annexes (Annexes II-V of the SFDR RTS), by adding a "yes/no" question to identify whether the financial product invests in fossil gas and/or nuclear energy. If the answer is "yes", a graphical representation of the proportion of investments in such activities will need to be disclosed. In addition, certain "inconsistencies" have also been amended in the templates.

As regards the next steps, following their adoption by the European Commission, the new RTS are now subject to scrutiny by the European Parliament and the Council who will have three months to object (and may even request that the scrutiny period shall be extended by three months). Following the end of the scrutiny period, the amendments to the SFDR RTS will enter into force on the third day following their publication in the Official Journal of the European Union. While it is possible that the European Parliament and the Council could confirm much earlier, i.e. before the expiry of the scrutiny period, that they do not intend to raise any objections, it is not expected that the new RTS will start applying before February 2023.

4. EU Commission FAQ on certain provisions of Disclosure Delegated Act under Article 8 Taxonomy Regulation 

The EU Commission recently completed its FAQ on the interpretation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of eligible economic activities and assets (i.e. Commission Delegated Regulation (EU) 2021/2178) ("Disclosures Delegated Act").

The initial version of the FAQ was published in October 2021 and included FAQs on how financial and non-financial undertakings should report taxonomy-eligible economic activities and assets in accordance with the Disclosures Delegated Act. This document completes the FAQs by adding new sections on how asset managers, insurers and credit institutions should report this information.

5. MiFID II product governance rules: integration of sustainability factors

The Grand Ducal Regulation of 27 July 2022 ("Grand Ducal Regulation 2022") introduces sustainability factors (as defined in Article 2(24) of SFDR) in the product governance rules applying to MiFID firms and UCITS ManCos/AIFMs which have the MiFID top-up license ("In-Scope Entities").

The Grand Ducal Regulation 2022 transposes the Commission Delegated Directive (EU) 2021/1269 into Luxembourg law and amends the Grand Ducal Regulation of 30 May 2018 on the protection of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.

Both the manufacturers (In-Scope Entities that create and issue financial instruments) and the distributors (In-Scope Entities that offer or sell financial instruments and services) must comply with the new obligations.

Manufacturers must:

  • take sustainability related objectives into account when identifying the potential target market for their clients’ financial instruments;
  • ensure that the financial instruments’ sustainability factors are consistent with the target market’s identified needs, characteristics and objectives;
  • provide distributors with the relevant information regarding sustainability factors of the financial instrument, in a transparent manner, in order to duly consider any sustainability related objectives of the client or potential client.

Distributors must:

  • ensure that the products and services they intend to offer are compatible with any sustainability related objectives of the target market.

These new obligations apply from 22 November 2022 and they will be completed by a new set of Guidelines on product governance rules that will be published by ESMA in the coming months. A consultation on these new ESMA Guidelines was open from 8 July 2022 to 7 October 2022. ESMA is currently reviewing the feedback received and expects to publish its final report with the final guidelines in Q1 2023.

6. ESMA Guidelines on MiFID II suitability requirements

ESMA published its final report on guidelines on certain aspects of the MiFID II suitability requirements ("Guidelines") in September this year.

The Guidelines apply to investment firms and credit institutions which provide the investment service of investment advice and portfolio management and also to UCITS ManCos and IFMs which have a MiFID top-up licence to provide those investment services4.

The Guidelines integrate the recent changes made in the MiFID II delegated acts and amends the current Guidelines on

on the following points:

  • the integration of sustainability factors, risk and preferences into organisational requirements and operating conditions for investment firms;
  • the good and poor practices identified in ESMA's 2020 Common Supervisory Action (CSA) on suitability;
  • the amendments introduced through the Capital Markets Recovery Package to Article 25(2) of MiFID II.

Some of the key changes brought to the previous version of the Guidelines (i.e. the 2018 ESMA guidelines) on the topic of sustainability are the following:

  • Information to clients: firms will need to explain to their clients the different elements of the definition of sustainability preferences and explain the difference between investment products with and without sustainability features in a clear manner, avoiding technical language.
  • Collection of information on clients' sustainability preferences: the information will need to include all aspects mentioned in the definition of sustainability preferences and will need to be sufficiently granular to allow for a matching of the client's sustainability preferences with the sustainability-related features of financial instruments.
  • Assessment of sustainability preferences: Once the firm has identified a range of suitable products for client, the firm will need to identify the product(s) that fulfil the client's sustainability preferences; and
  • Organisational requirements – Firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and of any updates of these preferences.

As regards the next steps, the Guidelines will be translated into the official languages of the EU and published on ESMA's website. They will apply six months after the date of the publication on ESMA's website in all EU official languages.

7. ESMA consultation on guidelines on funds' names using ESG or sustainability-related terms

On 18 November 2022, ESMA published a consultation paper with a proposal for guidelines on funds' names with ESG or sustainability-related terms.

Amongst other, for funds with ESG-related words in their name, the proposed guidelines would set quantitative thresholds of a minimum of 80% of investments that would need to meet the E/S-aligned characteristics or the sustainable objective and a minimum of 50% sustainable investments for funds that have "sustainable" in their name (or any word derived therefrom). The guidelines would provide a transitional period of 6 months for funds launched prior to the entry into force of the guidelines to bring their investments in line with the above requirements or to change their name.

Next steps: stakeholders have until 20 February 2023 to respond and ESMA then expects to issue the final guidelines by Q2/Q3 2023.

1Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 with regard to regulatory technical standards specifying the details of the content and presentation of the information in relation to the principle of 'do no significant harm', specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports.
2 The European Supervisory Authorities (i.e. ESMA, EBA and EIOPA).
3Commission Delegated Regulation (EU) 2022/1214, which includes a list of criteria that classifies investments in nuclear or gas power generation as "sustainable".
4 as referred to in Article 6(3)(a) and (b)(i) of UCITS Directive and Article 6(4)(a) and (b)(i) of the AIFMD.
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