CSSF SFDR FAQ | Addressing fund name considerations and efficient portfolio management techniques

Key SFDR clarifications on fund names (Question 7) and efficient portfolio management (Question 8)

The sustainable finance disclosure regulation (“SFDR”) has introduced a new era of transparency and sustainability in the financial industry. The CSSF has recently provided important clarifications through its FAQ as updated on 13 March 2023 (“CSSF FAQ”). In this article, we explore the recently added questions 7 and 8 of the CSSF FAQ, shedding light on fund name considerations and efficient portfolio management (“EPM”) techniques under SFDR.

Question 7: ESG and sustainability considerations for fund names

When it comes to fund names, according to the ESMA supervisory briefing on sustainability risks and disclosure in the area of investment management, there are specific environmental, social and governance criteria (“ESG”) and sustainability related considerations that financial market participants (“FMPs”) should be aware of. “The use of terms such as “ESG”, “green”, “sustainable”, ”social”, “ethical”, “impact” or any other ESG-related terms should be used only when supported in a material way by evidence of sustainability characteristics, themes or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy and its strategy as described in the relevant fund documentation.”. The key insights include:

• Fund name accuracy and clarity: FMPs must ensure that ESG and sustainability related terminology used in fund names accurately reflects the underlying investment strategy.

• Transparency and clarity are crucial to avoid any misleading information for investors.
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• ESG and sustainability integration: FMPs should consider integrating ESG and sustainability factors into the investment process to support the usage of ESG and sustainability related terminology in fund names.

• A robust ESG integration framework strengthens the credibility and authenticity of the fund's sustainability claims.
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• Marketing material alignment: CSSF emphasizes the importance of aligning marketing materials with the ESG and sustainability factors considered in the fund's investment strategy.

• FMPs should ensure consistency between the fund's name, marketing materials, and actual investment approach.

Question 8: Efficient portfolio management techniques for hedging purposes which play a significant role in managing investment portfolios

CSSF provides valuable guidance on efficient portfolio management techniques (“EPM techniques”) used for hedging purposes under SFDR:

• EPM techniques within the "remaining portion": CSSF clarifies that EPM techniques used solely for hedging purposes can be considered part of the "remaining portion" of the investment portfolio.

• FMPs should disclose the relevant information on these techniques in line with Article 9 SFDR requirements.

• Transparency and Risk Management: FMPs must ensure transparency and proper disclosure regarding the use of EPM techniques for hedging purposes.

• Comprehensive risk management practices should be in place to mitigate potential risks associated with these techniques as set forth by CSSF Circular 08/356.