Sustainable finance developments

During the second half of 2023, 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:

  • the ESAs’ final report on amendments to the SFDR RTS;
  • the ESMA public statement on the postponement of the ESG fund names guidelines;
  • the CSSF SFDR data collection exercise applicable to IFMs and IORPs
  • the ESMA explanatory notes on key topics of the sustainable finance framework;
  • the EU Commission’s public and targeted consultations on the implementation of SFDR;
  • the CSSF thematic review on the implementation of the sustainability-related provisions;
  • the CSSF action further to ESMA CSA on sustainability-related disclosures and integration of sustainability risks; and
  • the MiFID II product governance rules on integration of sustainability factors.

Each of these points are detailed below.

1. ESAs' final report on amendments to the SFDR RTS

On 4 December 2023, the European Supervisory Authorities (“ESAs”) published their final report on changes to the SFDR implementing regulation, the so-called regulatory technical standards (the “SFDR RTS”). While certain changes had been mandated by the European Commission, the ESAs took the decision to make a number of other changes in order to address perceived shortcomings of the SFDR RTS currently in force. The main changes are the following:

  • an extension of the social Principal Adverse Impact (“PAIs”) indicators (change mandated by the Commission);
  • other changes to the PAI disclosure framework (change mandated by the Commission); 
  • a new financial product disclosure of greenhouse gas (“GHG”) emissions reduction targets (change mandated by the Commission);
  • improvements and simplifications to the financial product disclosure templates, including a new “dashboard” with a simple summary of key information;
  • enhanced disclosure of how sustainable investments comply with the “do not significantly harm” (“DNSH”) principle;
  • revision of the provisions for products with investment options such as multi-option products;
  • other technical changes including harmonised calculation of sustainable investments and a requirement to produce the disclosures in machine-readable format.

Extension of social PAI indicators

To meet the Commission’s request for more balance between environmental and social indicators, the ESAs are proposing the addition of five mandatory social PAI indicators in table 1 of Annex I of the SFDR RTS, which include indicators such as companies active in the cultivation and production of tobacco, amount of earnings in non-cooperative tax jurisdictions of investee companies (whose revenue exceeded EUR 750 m on the balance sheet for two consecutive financial year ends) and gender pay gap.

DNSH – disclosure of thresholds

When taking into account the PAI indicators as part of the DNSH test for determining whether an investment is sustainable, it will be necessary to disclose the thresholds/criteria that were used for those PAI indicators. This is a significant change and it is likely that many financial market participants will now need to develop such thresholds.

GHG emissions reduction targets

This is a new disclosure in the pre-contractual, periodic and website disclosures and will only apply to financial products with GHG emissions reduction targets, such as financial products whose objective is carbon reduction pursuant to Article 9 (3) of SFDR. However, financial products who passively track the EU Climate Transition or Paris-Aligned Benchmarks will be subject to a simplified disclosure. Relatively simple disclosures will be required in the pre-contractual and periodic disclosures, while more detailed disclosures will need to be provided on the website. Information that needs to be disclosed consists of the type of outcome that the financial product is committing to achieve, the level of ambition of the target, the alignment with the goal of limiting global warming to 1.5 degrees Celsius and how the investment strategy will help deliver this goal.

Template simplification

Mainly for the purpose of simplification, the ESAs are proposing a total revamp of the pre-contractual and periodic disclosure templates. Corresponding changes will be made to the website disclosures. The key addition is a supposedly retail-friendly dashboard, which will contain information on whether the financial product promotes E/S characteristics or has a sustainable investment objective. In addition, four key elements will be prominently disclosed: 1. Sustainable investments (and committed minimum percentage), 2. Taxonomy-aligned investments (and committed minimum percentage), 3. PAI consideration and 4. GHG emissions reduction targets. While some of the existing template sections have been retained, the structure of the document has been completed changed and some of the guidance notes modified, which means that transitioning from the existing templates to the new ones is likely to once again result in a significant compliance burden.

Sustainable Investments

Based on Commission guidance in its most recent FAQ, the ESAs have deemed it necessary to require disclosure (in the pre-contractual, periodic and website disclosures) of whether the calculation method for determining the proportion of sustainable investments is either based on the economic activity or the investment level (i.e. pass-fail).


The Commission has three months to decide whether or not do endorse the draft SFDR RTS. If the Commission endorses the SFDR RTS, the Council and the European Parliament will then have three months to approve or object.

2ESMA’s public statement on the postponement of the ESG fund names guidelines;

In a statement published on 14 December 2023, ESMA has indicated that it would postpone its guidelines on funds’ names using ESG or sustainability-related terms to ensure that the outcome of the review of the AIFM and UCITS Directives can be fully considered. In particular, ESMA has received two new mandates to develop guidelines specifying the circumstances where the name of an AIF or a UCITS is unclear, unfair, or misleading. ESMA had launched a consultation on the guidelines on 18 November 2022.

In its statement, ESMA announced the following changes to the guidelines compared to the version in the consultation:

  • requirement of a “meaningful” investment in sustainable investments (instead of the previously contemplated 50%-threshold of sustainable investments for fund names with sustainability-related terms);
  • retaining of minimum 80% proportion of investments meeting E/S characteristics or sustainable investment objective;
  • application of Paris-aligned Benchmark exclusions but recognition that these are not appropriate for funds promoting social characteristics or focusing on transition;
  • new category of transition-related terms in respect of which the EU Climate Transition Benchmark exclusions should apply;
  • impact and transition-related terms in fund names will require “measurability”.


ESMA is planning to adopt the guidelines shortly after the date of entry into force of the amended AIFM and UCITS Directives.

3. CSSF SFDR data collection exercise applicable to IFMs and IORPs

On 30 November 2023, the CSSF published a Communication on the SFDR data collection exercise applicable to IFMs and IORPs on periodic disclosures in relation to SFDR and TR (“Communication”).

The Communication follows from the CSSF communication published on 30 June 2023 and announcing the launch of the data collection exercise relating to the disclosures in periodic reports for financial products disclosing under Article 8 or Article 9 of SFDR (see our previous legal update) and informs industry participants that an online solution via eDesk, for manual input by IFMs/IORPs for each fund/sub-fund they manage, is now available. This solution comes in addition to the possibility to submit the data by means of a structured file through S3 protocol.

The CSSF’s related user guide has been updated and is available under SFDR UCI periodic data collection – Practical and technical guidance.

4. ESMA's explanatory notes on key topics of the sustainable finance framework

On 22 November 2023, ESMA published three explanatory notes on the following key topics of the sustainable finance framework:

Each of these explanatory notes begins with a reminder of the concept referred to in the relevant regulations (i.e. SFDR, Taxonomy Regulation and, where relevant Benchmark Regulation) and includes a table listing the various requirements under these regulations. These explanatory notes do not introduce any new requirements and are based on EU Commission guidance.

5. EU Commission's public and targeted consultations on the implementation of SFDR

On 14 September 2023, the EU Commission launched its long awaited consultation on the implementation and potential shortcomings of SFDR, including its interaction with other parts of the EU sustainable finance framework and potential options to improve the framework.

The consultation is part of the Commission’s comprehensive assessment of the SFDR framework, regarding issues such as legal certainty, usability and how it can play its part in tackling greenwashing. The consultation could be the beginning of a major overhaul of the SFDR framework and comes on the back of the Commission’s realisation that SFDR is not achieving its main objective of being a transparency and disclosure regulation but that it is instead being used as a de facto labelling regime.

The consultation has been structured in two parts, with

  1. a public consultation covering:
    1. (i)current requirements of SFDR
    2. (ii) interaction with other sustainable finance legislation


  1. a targeted consultation looking to the future:
    1. (iii) potential changes to the disclosure requirements for financial market participants
    2. (iv) potential establishment of a categorisation system for financial products.

The public consultation asks a number of questions about the functioning of SFDR, such as whether the main objectives of SFDR are still relevant, whether the transparency through sustainability-related disclosures that it seeks to achieve supports the EU’s shift to a climate neutral economy and whether it is effective in increasing transparency towards end investors regarding the integration of sustainability risks and the consideration of adverse sustainability impacts. Questions are also asked about the usefulness of disclosures under SFDR and whether key terms are sufficiently clear, e.g.: the concepts such as “sustainable investments” and the requirements around principal adverse impacts. In addition to questions around the cost of disclosures under SFDR and data challenges, the consultation also covers perceived inconsistencies and misalignments in SFDR’s interaction with other sustainable finance legislation.

The targeted consultation is forward looking and contains questions about potential options to address the various shortcomings. Proposals for changes to the existing disclosure requirements contain potentially mandatory standardised product disclosures for either all financial products or only some who would exceed certain to be as yet undefined thresholds. The proposed standardised product disclosures could include the following: taxonomy-related disclosures, engagement strategies, exclusions and information about how ESG-related information is used in the investment process etc.

The fact that Articles 8 and 9 of SFDR are de facto being used as a labelling regime, and the apparent market demand for such labels, has led the Commission to consult on a voluntary product categorisation system that would be based on minimum criteria to address the risks of greenwashing. Two approaches are being considered: The first approach would build on and develop the existing distinction between Article 8 and 9 products with some complementary minimum criteria. The second approach would instead focus on the type of investment strategy (such as positive contribution, transition, exclusions etc.) and could result in the current distinction between Articles 8 and 9 of SFDR being removed altogether. Certain minimum criteria would again apply, such as taxonomy alignment, engagement strategies, exclusions and pre-defined, measurable, positive environment, social or governance-related outcome.

Next steps:

The deadline for participating in both consultations was 15 December 2023.

6. CSSF thematic review on the implementation of the sustainability-related provisions

On 3 August 2023, the CSSF published a Thematic Review on the implementation of the sustainability-related provisions in the investment funds industry (“Thematic Review”).

This review of SFDR, SFDR RTS, Taxonomy Regulation and the ESMA supervisory briefing on sustainability risks and disclosures in the area of investment management is part of its ongoing supervisory work.

In its Thematic Review, the CSSF shares its observations and expectations across the five following aspects:

  • organisational arrangements of investment fund managers (“IFMs”), including the integration of sustainability risks by IFMs
  • compliance of pre-contractual disclosures, including product website disclosures
  • compliance of periodic disclosure information
  • fund documentation and marketing communications
  • portfolio analysis

The CSSF reminds IFMs that (i) the correct implementation of the sustainability-related requirements in the investment fund industry is part of the CSSF’s supervisory priorities in the area of sustainable finance as communicated to the industry on 6 April 2023 and that (ii) the Supervisory Briefing on sustainability risks and disclosures in the area of investment management published by ESMA in May 2022 provides guidance to national competent authorities regarding the supervision of sustainability-related disclosures and the integration of sustainability risks.

The Thematic Review has also to be seen in the context of the launch of ESMA’s Common Supervisory Action (“CSA”) on sustainability-related disclosures and the integration of sustainability risks in July 2023 (see below).

7. CSSF action further to ESMA CSA on sustainability-related disclosures and integration of sustainability risks

On 6 September 2023, further to the launch by ESMA in July of a CSA on sustainability-related disclosures and the integration of sustainability risks in the investment fund sector, the CSSF indicated on its website that the Luxembourg-based UCITS ManCos and AIFMs in scope of this CSA had been contacted by email (CSSF Communication). As a consequence, UCITS ManCos and AIFMs that did not receive an email from the CSSF on 29 August 2023 on this subject matter are not concerned by this exercise.

The CSA is a two-stage process which will include in the first stage, a questionnaire focusing more closely on greenwashing risks and in the second stage, a questionnaire dedicated to the integration of sustainability risks and factors in the organisational arrangements of UCITS ManCos and AIFMs and to the transparency disclosures at IFM and fund level.

As a reminder, ESMA’s goal is to assess the compliance of supervised asset managers (i.e. UCITS ManCos and AIFMs) with the relevant provisions of SFDR, the Taxonomy Regulation and relevant implementing measures, including the relevant provision in the UCITS and AIFMD implementing acts on the integration of sustainability risks.

8. MiFID II product governance rules on integration of sustainability factors

Further to the publication in May 2023 of the new guidelines on suitability requirements, ESMA published the new product governance Guidelines (“New Product Governance Guidelines”) in all EU languages (ESMA35-43-3448) in August 2023.

By means of CSSF Circular 23/840 (dated 15 September 2023), the CSSF confirmed their application to the following entities: investment firms and credit institutions which provide the investment service of investment advice and portfolio management and also to UCITS ManCos and AIFMs which have a MiFID top-up licence to provide those investment services (i.e. discretionary portfolio management, investment advice or reception and transmission of orders).

The New Product Governance Guidelines specify the obligations applying as regards the integration of sustainability factors into the product governance obligations. They also take into account the following recent regulatory and supervisory developments:

They became applicable on 3 October 2023. The previous ESMA guidelines on this topic (ESMA ref: ESMA35-43-620) ceased to apply on the same date.