The CSSF has ordered all Luxembourg-based investment fund managers to review and, if necessary, correct their sustainability risk policies and disclosures, following a Europe-wide supervisory exercise that found compliance broadly satisfactory but still in need of significant improvement.
In its communiqué of September 30, the CSSF underlined that the requirement applies to every Luxembourg-domiciled IFM, including those that only manage so-called Article 6 funds, which are conventional funds without ESG claims. The regulator stressed that shortcomings identified during the review are not limited to Article 8 “light green” funds that promote ESG characteristics, or Article 9 “dark green” funds with a dedicated sustainable investment objective, but extend across the industry.
What the move really signals is that the CSSF is tightening its interpretation of existing obligations. “The publication… removes any residual ambiguity as to the regulator’s interpretation of the rules,” Valérian de Jamblinne and Antoine Portelange from Arendt’s ESG team told Investment Officer.
In other words, managers can no longer argue that sustainability risk integration is a gray area: ignoring the weaknesses flagged now risks being treated as a breach of binding law.
The CSSF’s move follows the European Securities and Markets Authority’s (ESMA) final report on the Common Supervisory Action (CSA) into sustainability risks and disclosures, carried out with national regulators across the EU between 2023 and 2024. The EU review examined how UCITS managers and AIFMs integrate sustainability risks into their governance, risk frameworks and disclosures under the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy and the sustainability risk provisions in UCITS and AIFMD rules.
Compliant, but weak
ESMA concluded that while most fund managers comply with the rules, weaknesses are widespread. Risk management processes often lack detail, Principal Adverse Impact (PAI) statements remain generic, and product-level disclosures are sometimes vague, inconsistent or not supported by measurable commitments.
In its national feedback, the CSSF said that Luxembourg findings were consistent with ESMA’s overall conclusions: compliance is generally satisfactory, but several areas require improvement.
Adverse impact statements insufficient
PAI statements at entity level are too often repetitive or difficult to locate on websites. Sustainability risks are not consistently integrated across all asset classes, and escalation procedures for breaches are frequently unclear. On the product side, funds using ESG or sustainability-related terms in their names sometimes lack corresponding binding commitments, while disclosure documents are occasionally inconsistent between precontractual, website and periodic reports.
The CSSF also pointed to good practices observed in some cases, such as clear methodologies for Do No Significant Harm (DNSH) testing and transparent explanations of sustainable investment thresholds. At the same time, it emphasized that all IFMs must now carry out a full compliance review against both ESMA’s report and the CSSF’s feedback, and implement corrective measures where necessary.
Legal and reputational risks
According to Arendt’s ESG lawyers, the potential consequences of ignoring the CSSF’s findings are both regulatory and reputational. Managers could face sanctions under the 2010 Law and CSSF Regulation No. 10-04, which provide the supervisor with wide enforcement discretion.
At the same time, sustainability shortcomings can damage investor trust and carry heightened reputational costs in an area as sensitive as ESG, they said. In rare cases, non-compliance resulting in damage could also trigger civil liability, though this tends to remain secondary.
Naming rules under scrutiny
A particularly sensitive point is the use of ESG terminology in fund names. ESMA’s new guidelines on fund naming, which entered into force earlier this year, set a stricter standard for aligning claims with binding commitments. The CSSF highlighted that funds using ESG-related terms in their names were not always backed by corresponding commitments in fund documentation.
Fund names and marketing materials, Arendt’s ESG team noted, have always been critical channels through which sustainability-related claims reach investors. A disconnect between what fund names promise and what fund documentation actually commits to deliver can seriously undermine investor confidence. In Luxembourg, the CSSF now expects adequate disclosure in the precontractual documentation of the elements supporting the use of ESG or sustainability-related terms. From a legal standpoint, the SFDR’s requirement for information that is fair, clear and not misleading also extends to fund names.
Beyond the prospectus, the lawyers said, it may be worth considering a review of all marketing materials—factsheets, presentations, website content—to ensure they do not overstate what is actually committed to in the fund documentation. Consistency across investor communications will be essential to avoid greenwashing allegations.
The CSA was launched in 2023 in response to growing concerns about greenwashing and inconsistent ESG disclosures across the EU. Its findings confirm that while Europe’s sustainable finance framework has been widely adopted, its application remains uneven.