On 6 April 2023, the CSSF published a press release in order to give a general overview of their supervisory priorities in relation to sustainable finance (the “Press Release”). The CSSF, in support of the long-term objective of integrating sustainability into financial strategies, have determined their supervisory priorities with the objective of fostering a cohesive implementation of the sustainable finance framework across the financial sector. This Press Release sets out the supervisory priorities of the CSSF for credit institutions, the asset management industry, investment firms and issuers.
Supervisory priorities for credit institutions
The three main supervisory priorities for credit institutions are:
- Transparency and disclosures:
This will ensure supervision of disclosure obligations for credit institutions under Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”) through the long form report, as revised by Circular CSSF 22/821.
- Risk management and governance:
One of the priorities for the supervision of the banking sector will be climate-related and environmental risks integration and mitigation. The CSSF plans to repeat its self-assessment exercise on climate related and environmental risks with a new sample of approximately 15 to 20 less significant institutions and third-country branches.
The CSSF will also carry out on-site inspections in relation to themes such as governance, business models and credit risks. In addition, the CSSF intends to carry out on-site inspections specifically focused on climate-related on environmental risks, from the end of 2023 or the beginning of 2024.
Credit institutions should also note the CSSF’s intention to conduct a sample-based review of remuneration policies and practices, to gain an understanding of how such policies have been updated to ensure consistency with the integration of sustainability risks in their governance and business models.
- MiFID rules related to sustainability:
The CSSF’s focus in this context will be on gaining an understanding of where the industry stands in the practical implementation of the sustainability rules under MiFID II. These supervisory measures will include carrying out on-site inspections with an updated MiFID control plan, integrating, among other elements, new sustainability-related obligations in the areas of product governance, sustainability assessments, conflicts of interest, information to clients and internal control functions.
Supervisory priorities for the asset management industry
The CSSF has five main supervisory priorities for the asset management industry:
- Organisational arrangements of IFMs, including the integration of sustainability risks by financial market participants:
Under SFDR, investment fund managers' (“IFM”) are required to comply with a set of rules regarding the integration of sustainability risks in their activities, and SFDR outlines mandatory website disclosures in this regard. The CSSF requires IFM’s organisational arrangements to account for the integration of sustainability risks, with particular reference to terms of human resources and governance, investment decision or advice processes, remuneration and risk management processes and policies, and management of conflicts of interest as required under SFDR. The CSSF’s supervisory approach, in this regard, involves the verification of these provisions in the IFM's organisational arrangements.
- Verification of the compliance of pre-contractual and periodic disclosures:
In order to verify this compliance, the CSSF will continue to assess the compliance of pre-contractual and periodic disclosures of investment funds with the SFDR regulatory provisions.
- Verification of the consistency of information in fund documentation and marketing material:
The CSSF plans to continue verifying the consistency of sustainability-related disclosures across the fund documentation and marketing material.
- Verification of the compliance of product website disclosures:
The supervisory actions of the CSSF in this regard will see the continuation in verifying that IFMs comply with their obligations regarding the publication and maintenance, on their website, of SFDR related information for the investment funds they manage.
- Portfolio analysis:
This supervisory duty will be fulfilled by the CSSF, by ensuring that portfolio holdings reflect the name, the investment objective, the strategy, and the characteristics displayed in the documentation to investors. In order to carry out the aforementioned verifications and to fulfil its general supervisory duties in this regard, the CSSF launched a dedicated SFDR data collection exercise, which we discussed in a previous newsflash.
Supervisory priorities for investment firms
The supervisory priorities for investment firms include transparency and disclosures, risk management and governance, and MiFID rules related to sustainability.
- Transparency and Disclosures:
Supervision by the CSSF of investment funds under this heading will involve the establishment of a self-assessment questionnaire in relation to the disclosure obligations, applicable under SFDR, to investment firms providing investment advice and portfolio management services. This questionnaire will be addressed to all investment firms and will form part of the contemplated reform of the long-form report.
- Risk management and governance:
The CSSF expects to implement a gradual approach to its supervision of ESG risks for investment firms, the priority being the recognition of ESG risks in their strategies and governance arrangements.
- MiFID rules related to sustainability:
The supervisory priorities for the CSSF in relation to MiFID sustainability rules for investment firms will replicate that of credit institutions, as described above.
Supervisory priorities for issuers
ESMA together with the European national accounting enforcers, including the CSSF, have identified European common enforcement priorities for the 2022 annual reports.
Particular attention will be paid to climate-related matters and the information required under Article 8 of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”) with regards to issuers.
For further information on this topic, please refer to our previous newsflash on CSSF enforcement priorities.
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