Sustainable Finance Insights Series - 19 | CSSF Thematic Review on Sustainable Disclosure

The objective of the Thematic Review is to inform the industry about the main observations that the CSSF has made in the context of its supervisory work and about the related recommendations for improvements in view of the applicable EU sustainable finance regulatory requirements that namely refers to:

(i) Regulation (EU) 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”);

(ii) Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (the “TR”);

(iii) Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 (“SFDR RTS”);

(iv) Commission Delegated Regulation (EU) 2021/1255 and Commission Delegated Directive (EU) 2021/1270, as transposed by CSSF Regulation No 22-05.

Organisational arrangements of investment fund manager (“IFMs”)

Delegation to third parties

The CSSF reminds IFMs that,

• delegation of portfolio management by the IFM has no impact on the accountability and responsibility of the delegator, i.e. the IFM;
• delegation to third parties must be subject to proper written initial due diligence, notably on the sustainability-related obligations, and ongoing monitoring by the IFM.

IFMs shall also ensure that the key performance indicators (“KPIs”) provided by the delegated portfolio manager (“PM”) (i) are comprehensive and complete and (ii) are established at appropriate frequency.

Risk management framework

IFMs shall address and cover in their risk management and internal governance processes all relevant sustainability risks that could cause an actual or a potential material negative impact on the value of an investment meaning that the risk management process:

• apply to all funds managed by an IFM, including those not disclosing under Article 8 or 9 of SFDR;
• involves, amongst others, reflecting the relevant sustainability risks, with:
  • the corresponding sustainability risk indicators, in the fund’s risk profile,
  • the risk limitation system and
  • the corresponding reporting to the senior management and the board of directors;
  • where relevant, the implementation of stress tests and scenario analyses.
• is not limited to verifying on an ongoing basis the compliance of the investment portfolios of the funds managed with the ESG-related investment restrictions laid down in precontractual disclosures.

IFMs shall have adequate checks/controls in place to monitor the compliance of all ESG-related restrictions laid down in precontractual disclosures.

Compliance of IFMs providing portfolio management and investment advisory services with sustainability-related provisions

IFMs are required to comply with SFDR’s disclosure obligations on the integration of sustainability risks.

Statement by IFMs that they do consider Principal adverse impacts (“PAI”) of their investment decisions on sustainability factors

Where IFMs consider PAI of investment decisions on sustainability factors, IFM shall publish on the IFM’s website, in a separate section, by 30 June each year, a statement on the format of the template set out in SFDR RTS.

Compliance of precontractual disclosures, including product website disclosures

Precontractual disclosures

CSSF provides the following observations:

• Disclosure of environmental/social characteristics or sustainable objectives: IFMs shall provide in precontractual disclosures sufficient details so that investors are reasonably able to understand the characteristics or objectives of the investment product and to take investment decisions on an informed basis.
• Fund names: IFMs shall use fund names that are aligned with the relevant fund’s investment objective and policy.
• Definition of sustainable investment: IFMs, after having carried out their own assessment of sustainable investments, shall disclose the underlying assumptions used as part of the precontractual disclosures and/or product website disclosures in a manner that is sufficiently detailed and easily accessible to be comprehensible, clear and not misleading for investors.
• Fund asset allocation: the asset allocation disclosed shall be aligned and comprehensive with regard to the environmental/social characteristics promoted by the fund or the sustainable investment objective pursued by the fund.
• Consideration of PAI at financial product level: IFMs shall provide sufficiently detailed and relevant information on the consideration of PAI which relates to the individual fund under consideration, including references to the procedures put in place to mitigate those impacts.

Product website disclosures according to Article 10 of SFDR

CSSF provides the following observations:

• Easily accessible disclosures: IFMs shall ensure that investors and particularly retail investors have an easy and straightforward access to information required by SFDR in a manner that is easily accessible, non-discriminatory, prominent, simple, concise, comprehensible, fair, clear and not misleading.
• “Summary” website section: IFMs shall summarize, in maximum length of two-sides of A4-sized paper, the information contained in the different sections referred into SFDR RTS.
• “Data sources and processing” website section: IFMs shall provide a coherent, relevant and sufficiently detailed description, in plain language, of all the following: 

  (a) the data sources used to attain the sustainable investment objective of the financial product (for funds disclosing under Article 9 of SFDR) or to attain each of the environmental or social characteristics promoted by the financial product (for funds disclosing under Article 8 of SFDR);

  (b) the measures taken to ensure data quality;

  (c) how data is  processed; and

  (d) the proportion of data that is estimated.

• “Limitations to methodologies and data” website section: IFMs shall provide a relevant and sufficiently detailed description while avoiding technical jargon, of all the following:
• (a) any limitations to the methodologies and the data sources; and
• (b) how such limitations do not affect how the environmental/social characteristics promoted by the financial product are met (for funds disclosing under Article 8 of SFDR) or why such limitations do not affect the attainment of the sustainable investment objective (for funds disclosing under Article 9 of SFDR).
• “Engagement policies” website section: IFMs shall provide a relevant and sufficiently detailed description of the engagement policies implemented where engagement is part of the environmental or social investment strategy (for funds disclosing under Article 8 of SFDR) or the sustainable investment objective (for funds disclosing under Article 9 of SFDR), including any management procedures applicable to sustainability-related controversies in investee companies.

Compliance of periodic disclosure information

Content of the periodic disclosure

The periodic disclosure shall present the performance of the sustainability indicators used to measure how each of these environmental/social characteristics were met for funds disclosing under Article 8 of SFDR, or the overall sustainability‐related impact of the financial product by means of relevant sustainability indicators for funds disclosing under Article 9 of SFDR, respectively.

IFMs should also provide information on :

• the sustainability indicators used,
• the limitations defined in precontractual disclosures for these indicators (if any) and
• a quantitative assessment of these indicators realised during the period.

IFMs shall provide, where applicable, for each fund concerned:

• sufficiently detailed and relevant information on the PAI considered during the period, taking into account the qualitative and/or quantitative information set out in the precontractual disclosures;
• information on the concrete actions and/or engagements of the IFM in relation to the investments held during the period, thereby considering the related provisions laid down in the precontractual disclosures.

Consistency of the periodic disclosure with the precontractual disclosures

The CSSF reminds IFMs that funds shall comply on an ongoing basis with all binding commitments of their respective investment strategy as disclosed in their offering document/prospectus, including the precontractual disclosures (i.e. minimum portion of sustainable investments).

Fund documentation and marketing communications

Consistency of information in fund documentation and marketing communications

The information in the marketing communications shall:

• not contradict the information disclosed pursuant to SFDR that include, notably the way the sustainability-related disclosures are presented, the fund’s name, the investment objective and policy and the investment strategy,
• not be limited to general descriptions,
• be specific to the fund under consideration,
• clearly reflect the claims made in the fund documentation,
• not contradict or diminish the significance of the information contained in the prospectus for UCITS or information disclosed to investors for AIFs.

Presentation of disclosures in marketing communications

IFMs shall provide information on product-level sustainability credentials (such as ESG labels, ESG ratings or ESG certifications), including when part of the marketing communications in a manner that is easily accessible, non-discriminatory, prominent, simple, concise, comprehensible, fair, clear and not misleading.

When IFMs refer to product credentials in the marketing communications, the following reference shall be made:

• a clear reference to the entity having granted the credential,
• the date on which such credential was granted,
• the hyperlink to the website where further information on the credential can be found (use of hyperlinks have to be limited, direct to the exact location and maintained over time),
• the hyperlink which points to all the sustainability-related information of the fund.

Portfolio analysis

The CSSF expects that:

• when monitoring the ongoing compliance of the investment portfolios of funds disclosing under Article 8 or 9 of SFDR, IFMs ensure that portfolio holdings of a fund reflects the name, the investment objective, the strategy and the characteristics displayed in the documentation to investors; and
• when controversies are considered for assessing whether an investment is sustainable and are disclosed as such in the pre-contractual disclosures, the IFMs ensure that the disclosures to investors on such controversies are sufficiently clear and that they have dedicated control processes/procedures to ensure that the investments remain compliant with the provisions on controversies set out in the pre-contractual disclosures.