Agefi Luxembourg - février 2025

AGEFI Luxembourg 28 Février 2025 Fonds d’investissement ALFI study finds Europe remains a global leader in sustainable finance T he third edition of the European Sus- tainable Investment Funds Study* analyses the current state of sustainable investing in Europe covering re- cent trends and regulatory developments. Europe remains the leader in sustainable fi- nance, now accounting for 85%of global sustainable funds’ net assets, totalling EUR 2.2 trillion, according to the study, produced byALFI in partnershipwithMorningstar and Tameo. Despite economic uncertain- ties, sustainable fund net assets grewby 20.2% in 2023. Luxembourg remains the do- minant investment hub for sustainable funds, hosting 34%of these assets. Global net assets in sustainable funds reached EUR 2.6 trillion by the end of 2023, an increase of EUR 1.5 trillion since 2019. After remarkable growth in 2020 (42%) and2021 (88%), growthslowedsignificantly to 3% in 2022, reflecting the broader slowdown in the asset management industry. However, momentum returned in 2023, withnet assets growing by 19%. Britta Borneff, Chief Marketing Officer at ALFI, said: “Europe continues to lead the global sustainable investment fund market, driven by a robust regulatory framework, including the SFDR, and strong investor demand. The study highlights both the growth and resilience of Europe’s sustain- able investment funds.We hope these insights sup- port decision-making, drive progress in sustain- able finance, andhelpbuild amore sustainable and equitable future.” Anne Estoppey, Research Analyst, Tameo, added: “The dynamic landscape of sustainable finance calls for continuous insights to sustain its remarkable growth. The studyprovides anessential state-of-the- marketanalysis,trackingkeytrends,comparingsus- tainable fund strategies to conventional ones, and deliveringdata-driven intelligence for investors, pol- icymakers, and stakeholders.” Additional key findings of the studywere: - Sustainable funds growth outperforms conven- tional funds: Assets in European sustainable funds havegrownby20.2%toreachEUR2.2trillionin2023, representing 19% of the European investment fund market. This compares to only 6% in 2019. Net in- flowsmeanwhileweredown toEUR77billion,with only EUR 4 billion of inflows into active strategies, compared to EUR 73 billion in 2022. Conventional fundinflowswerehoweverdwarfed-EUR14billion of inflows, and assets grewonly 16.9%. - New fund launches decline: 350 new sustainable fundswere launched in2023, down from616 in2022 and 760 in 2021. In addition, the reclassification of funds was almost neutral, 251 funds reclassified as sustainable while 237 funds reclassified as conven- tional investment funds. -Averagefundsizeroseacrosstheboard: Since2019, the average fund size for both conventional and sus- tainable funds has grown, reachingEUR370million andEUR416millionrespectivelyin2023.Sustainable funds have maintained a larger average size since 2020.Assizeincreases,investmentmanagerscantake advantage of economies of scale enhancing their op- erational efficiency. - Passive strategies continue to gain momentum : Demand for passive strategies in European sustain- ablefundscontinuedtorisein2023,withtheirmarket share growing from21%of net assets in 2021 to 29% by the end of 2023. Passive strategies also saw a growthrateof38.8%,significantlyoutpacingthe14% growth of active strategies, a trend also observed in conventional funds. - 5keyplayers continue todomi-nate: Compared to conventional funds, the sustainable funds market is more concentrated, with the top five investment managers accounting for 26%of the total net assets of sustainable funds, versus 21% for the top five in conventional funds. Concentration varied greatly by domicile, with Luxembourg’s share of the top five representing 35% of total net assets by the end of 2023, versus Ireland, the second-largest hub of sustainable funds, which had the top five invest- ment managers of passive funds managing 75%of total net assets. - Impact funds remain niche – Despite a CAGR of 31%since2019,impactfundsaccountedforonly18% of the net assets in sustainable investment funds by the end of 2023, down from 27% in 2021. This slow- downmirrorsthedeclineindemandforimpactfund strategies,althoughnetflowsfollowasimilarpattern to sustainable fundflows, peaking in2021beforede- clining in the subsequent years. -Article 8 funds dominate: 58% of funds are classi- fied asArticle 8 funds, while 4% areArticle 9. These figuresremainedunchangedin2022.Article6funds, meanwhile, represent 39% of sustainable funds, up 1% from2022. -SustainableETFsgainslightlylargermarketshare than conventional funds: For the first time, sustain- able funds have a greater market share of ETFs than conventional funds – 15%versus 14%. * https://lc.cx/9w1cmh Source: ALFI 2.6tr EUR % 3 % 11 % 85 FÀLFD3 DLV$ North America Europe ) g ©ALFI al net assets) f glob (% o 3202OFDEN THE TA REGION YBSDUNF BLE INAATUSSOF OWN DKABRE By Gersende MASFAYON, Counsel and Aziza GILIJOVA, Legal Advisor, DLA Piper S ince its adoption in January 2023, theCorporate Sustainability ReportingDirective (CSRD) has sparkedpassionate debates in the EU. Its detractors highlight the administrative burden it im- poses, which could lead to a loss of competitiveness for EU companies, especially small- and medium-sized enter- prises (SMEs). In short, the CSRD is seen as a “bureau- cratic delusion.” As a response to these concerns, on 8 November 2024, EuropeanCommis- sion President Ursula van der Leyen announcedaproposal toconsolidateEUsustainable finance regulations (including CSRD) into an “om- nibus regulation.” It’s not yet clear where this pro- posal will lead or to what extent it will amend the requirements under CSRD. Pending further an- nouncements following the Commission meeting scheduled on 26 February 2025, let’s take amoment to review the objectives of the regulation and its im- pact on Luxembourg. Avital tool for the EUGreenDeal As part of the European Green Deal, the EU has come up with an ambitious plan: transforming the EUintoamodern,resource-efficientandcompetitive economy, characterizedby the absenceof net green- house gas emissions by 2050 and an economic growthdecoupledfromresourceuse.Toachievethis goal, companies have to increase data availability anddisclosureof non-financial information.Greater transparency in economic activities should help channel financial andcapital flows towards sustain- able investments and limit the riskof greenwashing. Directive2014/95/EUon thedisclosureof non-finan- cial information and diversity information (NFRD) has introduced a requirement on some large under- takings and groups to report information on, as a minimum,environmental,socialandemployeemat- ters, respect for human rights, anti-corruption and briberymatters. Butsomeproblemshavebeenidentifiedastoitseffec- tiveness.Becauseofitslimitedscope,manyundertak- ings didn’t have to report sustainability information. AndNFRDdidn’trequiretheuseofcommonnon-fi- nancialreportingstandards,nordiditimposedetailed disclosure requirements.As a result, therewas a lack of comparability, reliability and relevance of the non- financial informationdisclosed. TheCSRDismeant togoone step furtherbyextend- ing the reportingobligations toadditional undertak- ings and creating a common reporting framework for sustainability information. Companies subject to CSRD will have to report according to European Sustainability Reporting Standards (ESRS) devel- opedbytheEuropeanFinancialReportingAdvisory Group.ThefirstsetofESRSwaspublishedon22De- cember 2023 under the form of a delegated regula- tionandappliestocompaniesregardlessofthesector they operate in. Implementation inLuxembourg On29March2024,abilloflaw8370wassubmittedto the Luxembourg Chamber of Deputies to transpose CSRD intonational law(Bill). In linewith theprovisions of CSRD, the reporting re- quirementswill successively apply to: - as from financial years starting on or after 1 Jan- uary 2024, undertakings (including non-EU enti- ties)withmore than 500 employees andbeing large entities listedonanEUmarket or listedparent com- panies of a large group; - as from financial years starting on or after 1 Jan- uary 2025, large undertakings or parent undertak- ings of a large group exceeding certain thresholds during two consecutive financial years (ie 250 em- ployees; net turnover of EUR50 million; total bal- ance sheet of EUR25 million); - as from financial years starting on or after 1 Jan- uary 2026, ◦ SMEs listed on an EU regulated market (except microundertakings); ◦ small and non-complex credit institutions that are large entities or listedSMEs; ◦captiveinsuranceundertakingsthatarelargeentities or listedSMEs; - as fromfinancial years starting onor after 1 January 2028, non-EUparent companies generating a net an- nualturnoverofatleastEUR150millionintheEUand eitherwithanEUsubsidiaryqualifyingas a large en- tityor as anSME listedonanEUregulatedmarket or a branch in the EU generating a net turnover of over EUR40million. Many financial institutions, large enterprises and multinational corporations (including their holding companies)will be subject tonewreporting require- ments in Luxembourg, whether on a standaloneor consolidatedbasis. Beyond the size criteria, the new CSRD requirements will only apply to specific corporate forms.TheseincludeS.A,S.C.A, S.à r.l, société cooperative as well as SNC and S.C.S, provided their unlimited partner(s) are established as limited liabil- itycompaniesofanyofthe aforementioned corpo- rate forms. Based on a strict reading of the Bill, S.C.Sp and S.A.S won’t be covered. Alternative investment funds(AIFs)andUCITSare out of scope of CSRD. Someexemptionsmayapply depending on the relevant struc- ture. Unlisted subsidiaries may be exempted from preparing a sustainability reporting if: - theirparent undertaking is established in theEuro- pean EconomicArea and it prepares a consolidated sustainability statement that include these sub- sidiaries. This exemption doesn’t apply to large un- dertakings that are public-interest entities; or - their parent undertaking is established in a third country and prepares a consolidated sustainability statement that’s carriedout inaccordancewithESRS or inamanner equivalent to those standards. But no equivalence has been determined to date. The scope of consolidation of sustainability infor- mationwas clarified recently following the Luxem- bourg Parliament’s submission of some amendments to the Bill on 28 October 2024. It’s been confirmed that the exemptions applicable to the scope of the consolidation of financial informa- tion should also apply to the scope of consolidation of sustainability information. This is especially rel- evant for asset managers who usually rely on the “Private Equity Exemption” under the Luxem- bourg law of 10 August 1915 on commercial com- panies, as amended, which exclude from the scope of consolidated financial statements undertakings whose “shares (…) are held exclusivelywith a view to their subsequent resale.” Main reporting requirements Undertakings falling under the scope of CSRDwill have to include the sustainability report in a dedi- cated section of theirmanagement report. Theywill have to complywith the following requirements: - Double materiality : in line with the approach al- ready adopted under NFRD, the undertaking will have tocarryout adoublematerialityassessment by disclosing not only how sustainability issues might affect the company (outside-in risks) but also how the company affects society and the environment (inside-out risks). - Value chain : the sustainability information to be disclosed should go beyond the boundaries of the undertakingor thegroup to include thewholevalue chain of the undertaking, including its products and services, its business relationships and its sup- ply chain. - Expanded audit report : Statutory auditors will have to issue an opinion on the compliance of the (consolidated) sustainability information with CSRD, including compliance with the ESRS. Based on the current Bill, auditors can either be the statu- tory auditor ( réviseur d’entreprises agrée ) in charge of the statutory audit of the undertaking or the group, or another statutory auditor. At this stage, Luxem- bourghasn’texercisedtheoptionunderthedirective tohaveanopinion issuedbyother typesof indepen- dent service providers. Inaddition to reputational damage, non-compliance withCSRDcanresultinsignificantsanctions,includ- ing fines and imprisonment for themanagement. Practical impact From a practical standpoint, the stringent require- mentsofCSRDentailestablishingrobustsystemsfor collecting and managing sustainability data across an undertaking, its group and its supply chain. This process has already proven to be resource-intensive andmay require significant investment innewtech- nologies and processes. The costs associatedwithcomplyingwithCSRD(in- cluding data collection and processing, reporting and assurance costs) can be significant. CSRDobligations canbeparticularlychallenging for wealth and asset managers. As stated by experts in the field: “Unlike other sectors, they manage com- plex,multi-asset class portfolios and investor expec- tations that vary widely across markets. These organisations face the challenge of having to report their direct operations and assessing and disclosing sustainabilityimpacts,risksandopportunities(IROs) across investment portfolios. This requires detailed insights into portfolio emissions, biodiversity, social impactandgovernancepractices–datawhichistyp- ically not as accessible or standardised.” (1) And now? The directive has already been transposed in some jurisdictions, andbusinesseshave startedpreparing. We’re seeing some reorganisations in Luxembourg to rationalize group structures in light of the CSRD requirements.Theuncertaintiesaroundtheomnibus regulationareinthatsensequiteunfortunate.It’salso worthnoting the recent speechbyLuc Frieden,who suggested halting the transposition in Luxembourg pending European decisions. The debate around CSRD revives the idea that progress on ESG topics can only be made at the ex- pense of efficiency and competitivity of businesses. That’scertainlynottheambitionundertheEuropean GreenDeal, nor the perception of stakeholderswho are pushing for its implementation. 1)SiddhiSalviandSashaPolikarpova,”FourstepstoprepareforCSRD and the niche challenges for wealth and asset managers”, published on 21November 2024. Corporate Sustainability Reporting Directive (CSRD): A legal perspective from Luxembourg