Luxembourg’s CSSF has issued its first SFDR compliance sanction, marking a shift to enforcement. Asset managers, take note—ESG disclosures must be accurate, clear, and aligned with investment policies.
On 15 October 2024, the Commission de Surveillance du Secteur Financier (the CSSF) issued its first administrative sanction for non-compliance with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR).
Following the publication of previous thematic reviews and messaging of supervisory priorities, this marks the start of the CSSF’s enforcement phase in relation to compliance with SFDR obligations. In line with the requirements of the European Securities and Markets Authority (ESMA)’s supervisory briefing of 2022 on sustainability risks and disclosures in the area of investment management, one of the CSSF’s priority areas of focus has been to ensure that portfolio holdings reflect the name, investment objective, strategy, and characteristics set out in the documentation shared with investors.
Increased scrutiny
What this enforcement action demonstrates, however, is that the protection of retail investors, usually seen as the most vulnerable segment of the financial sector when it comes to SFDR, is under increased scrutiny by the CSSF.
This does not mean that products offered to professional investors are omitted from the CSSF’s focus, but it is not surprising that the CSSF’s first sanction in relation to SFDR compliance targets a financial product aimed at the retail segment, nor that it concerns a “light green” product (i.e. one falling in the article 8 SFDR category), as these are the most vulnerable to green washing risks given they are subject to less stringent rules in relation to the composition of their portfolios than “green” products (i.e. those falling in the article 9 SFDR category).
Wording matters
The CSSF’s decision highlights the importance of the wording used when describing an investment policy promoting ESG criteria, the interpretation of such an investment policy by asset managers, and the related internal controls to be put in place to ensure that investments are filtered out if they do not satisfy the required ESG criteria in compliance with the strict interpretation of the investment policy.
As disclosures under SFDR (including those which describe the ESG criteria that article 8 SFDR products are required to promote) should, in particular, be accurate, clear and not misleading it is not surprising that the CSSF seems to have opted for a word for word interpretation of the relevant investment policy when assessing if the product was, as disclosed, “primarily targeting” a set of sustainable development goals.
The CSSF decision also highlights the importance of thresholds set and disclosed by asset managers in article 8 SFDR products’ documentation vis à vis which such products’ investment universes are defined and restricted (exclusion thresholds in the case at hand). Promoting ESG criteria is, after all, supposed to reduce the investment universe compared to article 6 SFDR products.
A key compliance challenge for asset managers in relation to article 8 SFDR products is ensuring an accurate reading of the investment policy’s ESG elements. This is a necessary and important prelude to defining the correct related internal investment processes with the right prioritization of the relevant product’s ESG ambitions [or, “characteristics”?] when filtering out investments.
Managers are responsible
In addition, the overall compliance challenge for asset managers is that they are responsible (as financial market participants) for the ESG ambitions of their products under SFDR which was a point implicitly reminded in the CSSF decision.
While the principles motivating the CSSF’s decision, in particular those directly relating to SFDR compliance, are already well-known by firms operating in this space and have been the subject of multiple guidelines and clarifications since the entry into force of SFDR, this decision is likely to trigger an increased awareness of the importance of the wording of SFDR disclosures, and the particular attention that should be given to them, which may lead to a reassessment of some investment selection processes.
Claire Guilbert, is partner and global co-head funds & asset management at Norton Rose Fulbright, is an investment management and investment funds lawyer based in Luxembourg. Cyril Clugnac is a senior associate at the firm. Norton Rose Fulbright is a Knowledge Partner of Investment Officer Luxembourg.
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