CSSF warns fund managers that SFDR disclosures are deficient

On 19 July 2023, Luxembourg's financial regulator, the CSSF, gave a presentation setting out its views on sustainable finance practices and where improvements in the market are needed. Their focus was squarely on disclosures under the Sustainable Finance Disclosure Regulation (SFDR) which they consider are often not detailed enough. This stated approach is consistent with the practice of the CSSF and its FAQ.

In its presentation, the CSSF identified three key issues: pre-contractual disclosures, website disclosures and fund names.

Pre-contractual disclosures

• The CSSF noted the need to be concrete when specifying environmental and/or social characteristics (SFDR Article 8) or sustainable investment objectives (SFDR Article 9), rather than just referring to a rating of the underlying investment. It cautioned against only using sustainability-related "buzzwords" when describing how investments contribute to characteristics or objectives. As an example, further detail is expected beyond stating that an investment contributes to "the transition to a low carbon industry". The CSSF said it would also like to see descriptions of how the environmental, social and governance (ESG) component is driving the fund's strategy.
• Where a rating is used to substantiate environmental and/or social characteristics, a description of the rating and its methodology would be needed. The fund would need to explain how the rating ensures promotion of environmental and/or social characteristics.
• The CSSF highlighted that SFDR pre-contractual disclosures need to include commitments that are binding on the fund. In practice, this means that the fund manager needs to have clearly defined criteria which it is contractually bound to evaluate potential investments against. Where a fund has binding commitments, potential investments that do not meet such criteria should not be invested in.
• The CSSF stated that asset allocation percentages, disclosed as minimum percentages in SFDR pre-contractual disclosures, also have to be treated as binding investment limits. Lack of monitoring of these limits may result in active or passive investment breaches.
• In addition, the CSSF called out the consideration of principal adverse impacts (PAIs). The description of PAIs considered is often not detailed enough and the description of how PAIs are considered is often missing.
• In terms of SFDR Article 9, the CSSF said it was important to set out the methods by which the fund manager assesses alignment with the definition of "sustainable investment".

Website disclosures

• Along the same lines as pre-contractual disclosures, the CSSF found that website disclosures are too generic and lacking in detail. It reminded fund managers that website disclosures need to be easily accessible, which means that hyperlinks (including any cross-references) should lead directly to where information can be found. Fund managers should also ensure that information provided is fund specific, in line with requirements under the SFDR Regulatory Technical Standards.

Fund names

• One of ESMA's areas of focus has been fund names. The CSSF noted the need to avoid misleading fund names and to tread carefully when using ESG related words in fund names. It noted that the market should expect further developments in this area.

Next steps

Given this stern warning from the CSSF, some fund managers may wish to review their existing approach to SFDR disclosures to ensure they are robust and in line with regulatory expectations.