CSSF Thematic Review on the implementation of sustainability

On 3 August 2023, the CSSF issued a thematic review covering the implementation of the SFDR, Taxonomy and the AIFMD and the UCITS Directive changes in relation to the integration of sustainability risks in the investment fund industry.

On 6 April 2023, the CSSF has initiated various actions to verify the correct implementation of the above sustainability-related requirements in the investment fund industry, including:

• On-site inspections on the integration of sustainability-related provisions in the governance of investment fund managers (IFMs); and
• An off-site thematic review to assess the correct implementation, by a sample of IFMs on sustainability-related provisions.

In this context of its supervisory work, the CSSF provides the following observations and expectations:

(i) Organisational arrangements of IFMs

• The CSSF reminds that IFMs are responsible for the disclosure requirements under SFDR in relation to the relevant financial product for which they act as IFM, regardless of the delegation of the portfolio management function to the portfolio manager.

• IFMs shall establish, implement and maintain processes that provide, as of the product design phase and continuing throughout the entire product life cycle, for the identification and management of relevant sustainability risks for each fund under management.

• A sustainability risk management process shall involve, amongst others, reflecting 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. This includes, where relevant, the implementation of stress tests and scenario analyses tailored to the relevant sustainability risks for the funds under management.

  (ii) Pre-contractual disclosures

• The CSSF expects IFMs to provide sufficient details regarding the environmental/social characteristics or sustainable objectives pursued by a given fund. The description shall be clearly stated and sufficiently explained so that investors can understand the characteristics or the objectives of the investment product.

• The CSSF expects IFMs, whether they are disclosing under Article 6, 8 or 9 of SFDR, to use fund names that are aligned with the relevant fund’s investment objective and policy. The CSSF reiterates the position of the ESMA within its supervisory briefing (the Supervisory Briefing): 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 objectives investment objectives and policy and its strategy.

• The CSSF reminds the European Commission’s position: SFDR does not prescribe a single methodology to account for sustainable investment and does not set out minimum requirements for qualifying concepts such as contribution, do not significant harm, or good governance. On that basis, the CSSF expects that IFMs shall carry out their own assessment of sustainable investments and disclose the underlying assumptions used, in line with the requirements outlined by the European Commission. The information disclosed in this context shall be sufficiently detailed and easily accessible.

• When principal adverse impacts (PAI) are considered at product level, the CSSF expects IFMs to provide sufficient information in this context. The CSSF reminds that these disclosures are not a consideration of PAI at entity level.

  (iii) Website disclosures

• IFMs shall publish and maintain on their website information for each fund disclosing under Article 8 or 9 SFDR. Such information shall be published, for each financial product, in a separate section titled “Sustainability-related disclosures”, in the same part of their website as the other information relating to the financial product, including marketing communications.

• The CSSF reminds IFMs to ensure that investors, and in particular retail investors, have easy and straightforward access to the above-mentioned information.

• For the “data sources and processing”, “limitations to methodologies and data” and “engagement policies” website sections, the CSSF expects IFMs to provide a relevant and sufficiently detailed description.

  (iv) Periodic disclosures

• The CSSF expects the periodic disclosure to 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 in that context 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. When using a specific internal methodology (e.g. scoring methodology), the disclosures should provide adequate transparency on the methodology, together with the underlying assumptions.

• In the consideration of PAI, the CSSF expects IFMs to provide sufficiently detailed information on the PAI considered during the period, taking into account the qualitative and/or quantitative information set out in the pre-contractual disclosures. Reference to a global policy adopted by the IFM and applicable to all managed funds without any disclosure on individual funds is not sufficient.

• The Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 supplementing Regulation (EU) 2019/2088 or 27 November 2019 on sustainability-related disclosures in the financial sector (SFDR RTS) requires that IFMs present, for each Article 8 or 9 SFDR fund, various sets of quantitative information in the periodic disclosures. In this context, 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 pre-contractual disclosures.

  (v) Fund documentation and marketing communications

• The CSSF reminds IFMs that their marketing communications shall not contradict the information disclosed pursuant to SFDR. Further, the information in the marketing communications in relation to SFDR shall not be limited to general descriptions and shall be specific to the relevant fund.

• The CSSF also expects the use of hyperlinks in the marketing communications to be limited.

  (vi) Portfolio analysis

• The CSSF reminds ESMA’s Supervisory Briefing position: portfolio holdings of funds must reflect the name, investment objective, strategy and characteristics displayed in the fund documentation.

• When controversies are considered for assessing whether an investment is sustainable and are disclosed, for instance by affirming that concrete cases of misconduct will be scrutinised, the IFMs should ensure that the disclosures to investors are sufficiently clear and have dedicated control processes/procedures to ensure that investments remain compliant with the provisions on controversies set out in the pre-contractual disclosures.