Agefi Luxembourg - décembre 2024

AGEFI Luxembourg 18 Décembre 2024 Fonds d’investissement T he Luxembourg Commission de Surveillance du Secteur Financier (CSSF) imposed for the first time a fine on a fund manager further to an on-site inspection focused on sustaina- bility and the obligations under the Sustainable Finance Disclo- sure Regulation (SFDR). It un- derscores the regulator’s focus on ESG compliance in the financial sector shortly after the entry into force of SFDR as the inspection was underta- ken as from 2022. Thefundmanagerwascarrying out the portfolio management function in respect of funds which were classified as promot- ingenvironmentaland/orsocialcharacter- istics (Article 8 under SFDR). Whilethepromotionofsuchcriteriaintheinvestment decisionprocessistypicallyconsideredasagreyarea, notably, as investment management is an activity wherethereisgenerallynoformalobligationofresults (“obligation de résultat”), the CSSF imposed the fine for the following shortcomings: Non-compliancewith pre-contractual disclosures The fundmanager failed to adhere to its declared in- vestment exclusion thresholds, which were publicly disclosed in pre-contractual documents. Specifically, the sub-fundheld several bonds fromcountrieswith ESGscores belowthe stated exclusion criteria. Failure to alignwithUnitedNations SustainableDevelopment Goals (SDGs) Thefundmanager’sinternalcontrolsdidnotsubstan- tiatethefunds’claimsof“primarilytargeting”specific SDGs, as outlined in the prospectus. This misalign- mentraisedconcernsabouttheintegrityofdisclosures andgovernancemechanisms. The CSSF determined that these lapses contravened key provisions of Luxembourg’s regulatory frame- work, includingArticle 10(2) of CSSFRegulationNo. 10-04 (requiring sound administra- tive procedures and controlmech- anisms) andArticle 26(3) of CSSF RegulationNo.10-04(mandating managementcompaniestoactin the best interests of theUCITS). It is interesting to see how the binding features of SFDR, as indi- cated by the ESAs in 2022 in their Q&A on SFDR, (1) is ac- tually implemented by a national regu- lator. In the case at hand, the evidence of the breach is a bit easier as it concerns an exclusion: the in- vestment policy of the fund was clearly preventingtheinvest- ment in assets that did not match an objective criteria being the ESG score of a country. The secondgroundof thepenalty ismore surprising, as SDGs are general principles. However, it demon- stratesthatonceagain,Europeanregulationisimpos- ingrobustinternalprocesses,reliableimplementation toolsandreportingtodemonstratethatthefundman- ageriscomplyingwithallitsrequirementsanditsun- dertaking under the fund documents in a precise manner. While the monetary fine is modest and has been basedontheprincipleofproportionality,thisdecision servesasawarningforAIFMs.TheCSSFhasdemon- strated itswillingness to impose sanctions andscruti- nize SFDR compliance rigorously. - Strengthenedgovernance is key Fund managers must establish robust governance and administrative frameworks to ensure alignment betweendisclosedsustainabilityobjectivesandactual investment practices. - Transparency is non-negotiable Claims made in pre-contractual documents or prospectuses should be substantiated with credible andmeasurable actions to be actually implemented. Misalignment risks regulatory sanctions and reputa- tional harm. - EvolvingESGcompliance landscape As the CSSF sets a precedent, future sanctions may target more severe breaches with heftier penalties. Fund managers should anticipate increased regula- tory scrutiny andprepare accordingly. This case signals a turning point in ESG oversight in the European fund management sector. As sustain- abilitybecomes central to investment strategies, fund managersmustprioritizecompliancetonotonlymeet regulatoryobligationsbutalsomaintaininvestortrust in the credibility of ESGclaims. Catherine MARTOUGIN, Partner, Funds & Asset Management Sophie ARVIEUX, Professional Support Lawyer, Baker & McKenzie Luxembourg 1) On 17 November 2022, the joint committee of the ESAs published a Q&AontheSFDRDelegatedRegulation(CommissionDelegatedReg- ulation(EU)2022/1288)(JC202262). CSSF’s first sanction in the context of ESG: Key lessons for fund managers Fostering Confidence: TheAllure of Assurance in SFDR’s Regulatory Evolution A critical appreciation on how this has aged! By Kenny P ANJANADEN & Geoffroy M ARCASSOLI , ESG Assurance Partners, PwC Luxembourg L ast year, we explored the pi- votal role of assurance in the evolving regulatory frame- work of the Sustainable Finance DisclosureRegulation (SFDR), fo- cusing on five key themes: 1. The constant evolution of SFDR: adapting toa labelling regime – examin- ingthepotentialshiftfromadisclosure-fo- cused regime to a labelling (or product categorisation)regimeanditstransforma- tive implications. 2. Regulatory focus intensifies – high- lighting the increasing scrutiny from regulators. 3. Value addition for investors: non-fi- nancial information as a competitive edge – emphasising how assured non- financial information can differentiate financial products in a sustainability- conscious market. 4. Assurance providers: elevating stakeholder confidence – exploring the role of assurance providers in enhanc- ing trust and credibility in sustainability disclosures. 5. Convergence of CSRDandSFDR:A harmonised future – analysing the alignment of these frameworks to create a cohesive reporting and assurance landscape. Thisyear,we revisit these themes toeval- uate how the arguments we advanced have aged in the light of ongoing regula- tory and market developments. Have shifts toward labelling materialised or gained momentum? How has the regu- latory landscape evolved, and what lessons can be drawn from implementa- tions? Are financial market participants realising the anticipated benefits of as- sured non-financial information? And crucially,howhasthealignmentbetween SFDR andCSRDprogressed? By examining these questions, this fol- low-uparticle aims toassess thepractical impact of the trends we identified and provide fresh insights for navigating the ever-evolving regulatory landscape. It is both a reflection and a forward-looking guide for stakeholders committed to fos- tering transparency, accountability, and sustainability in finance. The constant evolution of SFDR: adapting to a labelling regime In2023, the SFDR landscapewas charac- terised by discussions of a potential paradigm shift from a product trans- parency regime to a labelling or product categorisation regime. This shift would emphasise sustainabilitycredentials over descriptive disclosures, demanding ro- bust assurance tomaintain credibility in sustainability claims. We have reviewed the responses to the targeted consultation on implementing the SFDR. It is evident that there is strong momentum toward categorising finan- cial products. However, this categorisa- tionmust be approached thoughtfully to be effective, guided by objective criteria. It should include a clear articulation of the product’s sustainability intentions, a detailed explanation of the ESG strate- gies to be employed, and the establish- ment of credible KPIs. While this approach will provide greater clarity for investors, it also introduces op- erational challenges for financial market participants (FMPs) inadhering toprede- fined criteria. Additionally, assurance providers have seengrowingdemandasFMPswillstrive to validate their labels amid increased scrutiny or the quest of a fair perception. The ESMA guidelines on fund names further underscore the growing commit- ment to categorising and clarifying the range of products offered, reinforcing the push for greater transparencyandconsis- tency in the investment landscape. Regulatory focus intensifies We had highlighted regulators’ growing interest in the quality of non-financial in- formation, illustrated by initiatives we have seen in Luxembourg and Ireland aroundthematicreviewsordatacollection exercises. These signalled a shift towards a more comprehensive evaluation of fi- nancial products’ sustainability aspects. In2024, regulatory scrutiny reachednew heights. The CSSF emphasised its priori- ties in supervising sustainability regula- tions, particularly ensuring IFMs’ compliance with the SFDR and Taxon- omy Regulation. Core focus areas in- cluded integrating sustainability risks into organisational frameworks, verify- ing adherence to disclosure require- ments, ensuring consistency in fund documentationandmarketingmaterials, and conducting portfolio analyses to align holdings with declared objectives. TheCSSF’s annual report andother pub- lications throughout the year highlighted sanctions imposedon IFMs fornon-com- pliance. On top of that, it would be need- less to state the exorbitant fines imposed by the regulator in a territory that has not been bullish towards ESG practice in the last months, which clearly demonstrates thatitisnotonlyadomesticmarkettrend. Value addition for investors: non-financial information as a competitive edge The shift towards responsible investing was recognisedas a transformative trend, withnon-finan-cialinformationemerging as a strategic differentiator for financial products. Assured SFDR annexes were seen as crucial for attracting ESG-con- sciousinvestorsandreversinggreenwash- ing concerns. This year, the demand for non-financial information surged,becomingadefining trend in the investment world. Investors increasingly favoured products backed by independent assurance , recognising the growing importance of verified sus- tainability claims. Data has shown a marked increase in inflows into funds with verifiable sustainability credentials, a clear signal of trust in transparent prac- tices. Meanwhile, the reputational risks associated with greenwashing have promptedmany financialmarketpartic- ipants (FMPs) to proactively engage as- surance services, aiming to bolster investor confidence and credibility. As a result, our practice has been excep- tionally busy, with a significant uptick in demand for substantiating sustain- ability reports over the past year. This surge spans across all asset classes, re- flecting the broader industry’s commit- ment to verifiable sustainability and responsible investing . Convergence of CSRDandSFDR: Aharmonised future The growing alignment between CSRD andSFDRrequirementswasseenasapiv- otal moment in sustainability reporting, withharmonisedmetricspromisingtore- ducereportinginefficienciesandenhance transparency. In 2024 ,theconvergencebetweenthe Cor- porate Sustainability Reporting Direc- tive(CSRD) andthe SustainableFinance DisclosureRegulation(SFDR) reacheda pivotal milestone, marking a significant step forward in sustainability reporting and compliance. The introduction of har- monised reporting and materiality as- sessments provided organisations with the tools to simplify and streamline their compliance processes, ensuring greater consistency and clarity across the board. Entities subject to both directives found themselvesbenefitingfrom enhancedcla- rity and reducedduplication inreporting requirements.Thisintegrationnotonlyal- leviated administrative burdens but also paved the way for more coherent and comprehensive sustainabilitydisclosures. By aligning key frameworks, the conver- gencehasempoweredcompaniestomeet regulatory expectations more effectively while simultaneously improving the transparency and reliability of their sus- tainabilityperformance. Conclusion Thedevelopments of 2024 reflect afinan- cial landscape in flux, shaped by regula- tory advancements, investor demands, and industry adaptations. Fromthe shift towards labelling to the intensificationof regulatory focus and thedeepening con- vergence of CSRD and SFDR, the jour- ney toward sustainable finance is increasingly intertwinedwith assurance and transparency. As we look ahead to 2025, the financial sector stands at a critical juncture.Organ- isations that embrace these changes as opportunities—investing in robust non- financial reporting, aligningwith evolv- ing regulations, andengaging assurance providers—arenot just ensuring compli- ance. They are building the foundations of trust, integrity, and resilience in a rapidly transformingworld. But,we’llseeaboutthatinoureditioncov- ering 2025!