When it comes to ESG and sustainable investing, Luxembourg’s financial regulator is keen to ensure that investment funds will stick to their promises when they sell products that are branded as green and sustainable.
CSSF is preparing dedicated guidance for funds which will be released “as soon as possible”. The regulator also said that the industry, in Luxembourg and elsewhere in Europe, will be subject to a common supervisory action possibly in the third quarter of 2023, as a deep compliance check on how markets have embraced the EU requirements.
“Disclosures will need to be fair and not misleading, clear to investors,” said Shaneera Rasqué, the CSSF’s ESG Coordinator for Investment Funds. “We expect fund managers to keep the promise of what they are selling to investors.”
Maintaining trust
“It’s important that investors can trust and keep their trust in the financial products that are being offered. You don’t want to lose the opportunity to impact the climate through finance,” said Laura Gehlkopf, the CSSF’s ESG coordinator.
Rasqué and Gehlkopf both took to the stage on Wednesday, the third and final day of three days of discussions on sustainable investing in Luxembourg, to be interviewed by Isabelle Delas, the chief executive of Luxflag, as part of Luxflag’s sustainable finance week. From the discussions, it became clear that CSSF sees sustainable finance as far more than a mere alternative to what some would call “traditional finance”.
“Sustainable finance is transversal and crosscutting,” said Gehlkopf. “I like to speak about sustainability by design. It is a matter of integrating all these criteria into what we do.”
Creating an alternative financial system “is not the goal here,” she said. “The goal is to have a financial system that is sustainable throughout.”
Complex framework
In order to achieve such a change, the EU financial system is made subject to a comprehensive new framework that includes various regulations and directives, most notably the Sustainable Finance Disclosure Regulation (SFDR), the EU taxonomy and updated directives such as Mifid 2 and accompanying technical standards, known as RTS.
Several major deadlines are looming. From 30 June next year, additional technical standards will be activated while the SFDR requires additional disclosures on sustainable investments from January 2023, through for instance the websites of investment firms, annual reports, and harmonised ESG reporting templates.
And two months sooner, by 31 October of this year, CSSF requires Luxembourg firms to demonstrate how they plan to communicate this information. Rasqué said the CSSF will consider both the quantitative and qualitative aspects, and expects firms to be “really comprehensive” when they lay out their sustainable investment strategy.
Luxembourg deadline looms
By the end of this month, firms need to tell CSSF how they expected to provide guidance on the integration of sustainability risk in what is known as their “pre-contractual documents”, or the marketing communication of funds to investors.
“The main objective is to provide guidance on integration of sustainability risk. There needs to be consistency in fund documentation, websites, annual reports. The principles set out in the briefing need to be taken into account,” she said, referring to the communication on this topic, known as the Level 2 SFDR RTS, that CSSF issued in July.
One important aspect that CSSF has yet to clarify is the definition of thresholds for SFDR funds in terms of sustainable investments. Some national regulators, such as the Dutch AFM, are now insisting that a “dark green” Article 9 SFDR fund holds 100 percent of sustainable investments. Several Dutch funds have been forced to reclassify Article 9 funds because they only contained 80 or 90 percent. National regulators in other EU countries appear to be less strict. It remains to be seen which threshold the CSSF will apply.
“The definition of thresholds is a fundamental question still under discussion,” Rasqué told the Luxflag panel, without specifying a time frame for answering this question.
CSSF also integrating ESG
Gehlkopf said ESG AND sustainable finance will be integrated comprehensively into the work of the CSSF, as will be expected also from the organisations that it supervises.
“One can only agree that the regulatory framework is moving quickly. We’re talking about fast-moving implementation, also in 2023. Markets can only be ready for these challenges if they start their preparation now. They should already have started,” she said.
Firms, and CSSF, also will be required to train their staff and to upscale the inhouse educational frameworks. Gehlkopf also underlined that CSSF expects the private sector to play a role in educating the general public. “We talked about how it’s necessary for investors to have this trust in the sustainable finance framework. They can also play a role in helping the public, the retail investor, understand this framework.”
Won’t happen overnight
A recent Luxembourg survey conducted by CSS has demonstrated that the public is interested and that there is a clear lack of understanding.
“We are aware that this is not going to happen overnight,” Gehlkopf said. “We’re aware there are outstanding questions. As an organisation, keep in mind what the goal is. There is a path to be found in this. I am not advocating complex layers of regulations, but by integrating ESG into traditional governance - risks management, remuneration, valuations -, we will be steering the transition of the financial sector.”
“Luxembourg has an opportunity here to develop a best practice,” she said.
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