Luxembourg’s financial supervisor CSSF this week presented its priorities in the area of sustainable finance. The regulator said it strives to “accompany the transition of the financial sector and its players in a proactive way”. It has defined separate priorities for banks, for asset managers and for investment firms.
The EU’s Sustainable Finance Disclosure Regulation, or SFDR, is often referred to when it comes to the CSSF priorities, as is the EU taxonomy and sustainability requirements under the Mifid rules. CSSF said it also will consider on-site inspections in this context, announcing specific climate and ESG-focused inspections from as early as the end of this year.
“On-site inspections in relation to themes such as, amongst others, governance, business models and credit risks will include aspects with regard to climate-related and environmental risks,” it said. “From year end or beginning of 2024 the CSSF also intends to carry out on-site inspections specifically focused on climate-related and environmental risks.”
For asset managers, CSSF applies a risk-based approach to define priorities for the way investment fund managers are organised, for the verification of marketing documents and website disclosures and for portfolio analysis. Investment firms will be assessed on transparency and disclosure, on risk management and governance, and on how they act under the Mifid rules related to sustainability.
Smaller banks and foreign branches also to be inspected
Banks will be held accountable by the supervisor on their transparency and disclosures under SFDR, on climate-related and environmental risks integration and mitigation, and Mifid rules related to sustainability. The CSSF said it plans to repeat a self-assessment exercise on climate related and environmental risks with a new sample of approximately 15 to 20 less significant institutions - smaller banks - and third-country branches.
CSSF said it sees the integration of sustainability and “adequate consideration” of sustainability risks as key drivers of financial strategies as a long-term objective. With its priorities, it aims to foster “a cohesive implementation” of the sustainable finance framework across the financial sector and to ensure the integration of ESG requirements in its supervisory practice.
“The regulatory framework in relation to sustainable finance continues to be further enhanced and progressively improved upon,” a CSSF communiqué says. “In such an evolving context, and taking into account regulatory developments as well as developing practices, the CSSF will adopt a gradual approach to including the relevant changes in its supervision.”
Industry plagued by confusion
Its announcement comes at a time when the asset management industry is plagued by confusion over the EU’s sustainable finance framework amid heightened fears of greenwashing accusations. In recent months, classifications under the EU sustainable finance disclosure regulation, known as SFDR, for hundreds of funds have been downgraded.
No less than 70 per cent of ETFs that were claimed to be among the most sustainable of their kind - or ‘Article 9’ under SFDR - have been downgraded in a year. These passive funds, instead of having sustainable investing as an objective , were found to have only an element of ESG, according to data published in March by Trackinsight, a French database. Blackrock and Amundi, like many other asset managers, also have lowered the SFDR classifications for many of their funds.
The European Commission, under fire for a poor definition of sustainability and ESG, has announced a major review of the SFDR, which is expected this summer.
Firms hold primary responsibility
Meanwhile, the CSSF said that the primary responsibility of ensuring compliance with applicable requirements “lies with the supervised entities and their board members, who should ensure that the integration of ESG factors in traditional governance, risk management and compliance tools is a focal point within their organisations, and endeavour to make suitable ESG education a priority for themselves and their personnel”.
The CSSF said its priorities document aims at drawing the attention of the financial sector to a number of prominent matters to be addressed in this area. If deemed necessary, our supervision priorities may be adjusted, and the CSSF’s duties of ongoing prudential supervision may also warrant other ESG-related aspects to come under scrutiny.