Luxembourg fund managers ordered to review costs and fees
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Luxembourg’s financial supervisors are preparing for tough scrutiny of the annual reports that firms will produce in the coming months. The 2022 reports are required to elaborate in detail on the impact of climate change, on the financial fallout from the Ukraine war and on the effects of inflation and rising interest rates.

Like last year, supervisory authority CSSF has listed the impact of “climate-related matters” as a top priority to be addressed by securities issuers that report on their financial performance according to the International Financial Reporting Standards. Non-financial information needs to be consistent with the financial statements, and energy purchase agreements also are expected to be addressed.

The climate review “remains particularly relevant” for 2022 annual reports, said CSSF, while signalling that it will subject these reports to closer scrutiny than last year. In the 2023 campaign, CSSF “expects significant progress” to be made on reporting on climate in the non-financial information.

“Boilerplate disclosures on climate related topics are not what is needed by users of the financial statements,” CSSF said in a communiqué issued on the second day of the year. “They require specific and relevant information on how climate risks have been factored in the financial statements.”

Ukraine impact

When it comes to reporting the financial impact of the Ukraine war, CSSF said “it is absolutely necessary to present clear and detailed qualitative and quantitative information”, both in terms of balance sheets and income statements, as well as on assumptions made.

The current economic environment, according to CSSF and its European peers, poses “significant challenges to issuers and their operations”. Hence, firms are expected to report on inflation, interest rates and energy costs. The recent hikes in eurozone interest rates have “a significant impact” on potential impairment of financial assets and future cash flows.

Regarding inflation, CSSF wants “sufficient information” explaining how inflation affects profits, margins, liquidity and forecasts. It noted risks in relation to the issuers’ capacity to absorb higher energy and raw materials costs through price increases, while the decrease in clients’ purchasing power could also affect sales.

In the 2023 campaign, firms are expected to take “a major step” in their non-financial reporting under the EU’s Taxonomy Regulation. The financial year 2022 is the first that requires them to show how their business is alight with climate change mitigation. CSSF said it will “challenge issuers” on recommendations made on their 2021 annual reports.

Supply chains

Finally, firms are expected to address the carbon emissions in their supply chains. “An entity’s environmental and social footprint extends well beyond its own walls,” CSSF said. Benchmarking their ESG performance across teh entire cycle against competitors “is useful and can not only reveal hidden ESG strengths within the value chain, but can show companies where they need to improve in order to match or exceed industry standards.”

CSSF said its requirements for annual reports are aligned with the European Common Enforcement Priorities set out by the European Securities and Markets Authority, Esma.

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