On 13 March 2023, the CSSF updated the FAQ on SFDR by adding three additional questions and answers.
- Use of the environmental, social, and governance (“ESG”) and/or sustainability related terminology in fund names: are there any ESG and/or sustainability related considerations that financial market participants (“FMPs”) need to take into account with respect to the fund names?
The CSSF reminds FMPs that information required by SFDR should be easily accessible, simple, fair, clear and not misleading which also applies to fund names. Consequently fund’s names should not be misleading and disclosure of sustainability characteristics should be commensurate with the effective application of those characteristics to the fund.
FMPs must align fund investment objectives and policies with the relevant principles-based guidance on fund names given by the ESMA Supervisory Briefing on sustainability risks and disclosures in the area of investment management (as well as any further development on the topic at European level). Such supervisory briefing notably sets forth the use of terms such as “ESG”, “green”, “sustainable”, “impact” and other ESG–related terms which should only be used when supported in a material way by evidence of sustainability characteristics.
- Methodology used to define sustainable investments: shall the methodology used to define sustainable investments be made available to investors?
European supervisory authorities (“ESAs”) have included in their list of additional SFDR queries a question to the European Commission to understand whether an investment in an investee company which has one economic activity among several other economic activities that contributes to an environmental or social objective (and none of the economic activities significantly harm any environmental or social objective and the company follows good governance practices) would be considered to be “sustainable investment” as a whole or in part.
While awaiting clarification at European level, the CSSF would in the meantime expect that the methodology used for the definition of a sustainable investment within the meaning of Article 2(17) SFDR, as well as, where applicable, the applied thresholds be made available by the FMPs to investors through, for instance, mandatory disclosure templates, prospectus/issuing document and/or website disclosures (all in accordance with Article 2 SFDR regulatory technical standards and Article 10 SFDR).
- Efficient portfolio management techniques (“EPM”): can EPM techniques used for hedging purposes fall within the remaining portion of the investment portfolio of funds disclosing under Article 9 SFDR?
An Article 9 SFDR fund may, next to “sustainable investments”, also include investments or techniques used for hedging purposes or relating to cash as ancillary liquidity, provided those are in line with the sustainable investment objective of the fund.
As such the CSSF considers that when used for hedging purposes, EPM techniques fall within the “remaining portion” of the investment portfolio of funds disclosing under Article 9 SFDR.
Attention should also be made to CSSF Circular 08/356 stating that EPM techniques may be used for different purposes, including for the purpose of risk reduction. As such, FMPs are responsible for assessing the precise purpose of the use of EPM techniques and whether those could fall in the “remaining portio” of the investment portfolio (if and when used in the context of funds disclosing under Article 9 SFDR).
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