Luxembourg's Green Transformation
The rise of Sustainable Finance has reshaped the financial system in an unprecedented way, impacting the European Fund Industry and the corporate sphere.
This transformation marks one of the swiftest regulatory and market shifts since the UCITS Directive established a collective investment framework. Despite pioneering this field, EU Sustainable Finance regulation has faced criticism for being ”complex”, “resource intensive,” and “counterproductive.”
Following challenging product disclosure implementation in January 2023, European authorities are now keen to address system challenges. Asset managers were recently surprised by hints of shift or a complete reversal of prevailing requirements.
What were the initial objectives? In late 2019, European authorities outlined a clear approach:
Urgent action aligned financial system with the 2015 Paris Agreement;
Harmonised product disclosure empowered informed investor decisions; and
Sustainability disclosure integrated risks and impacts (double materiality), a departure from single materiality approaches.
What have we learned so far?
The main risk is widespread greenwashing, or, otherwise, the risk of deviating from the legislator's intent to the extent of exacerbating the environmental and social issues we claim to address.
How could we improve?
In the course of its 2022 on-site inspections, the Luxembourg financial regulator underscored critical observations concerning ESG thematic controls. Notably, certain Investment Fund Managers (IFMs) lacked essential key performance factors from delegated portfolio managers, hindering their ability to ensure alignment with sustainability objectives.
Additionally, the CSSF identified several deficiencies in implementing controls to verify compliance of investment portfolios with the quantitative ESG restrictions specified in the prospectuses of managed investment funds.
Looking ahead, success hinges on three key areas:
Supervisory convergence: Leveraging ESMA’s Common Supervisory Actions, Luxembourg’s regulators must enhance governance and oversight. This includes a robust policy framework covering the investment process, product approval, sustainability risk management, and effective monitoring is crucial.
Proficient product disclosure: Efficiently producing, maintaining, and disseminating investor disclosures, including structured data reporting, translation efforts, and consistency checks. This is vital for positioning Luxembourg as an inviting hub for end investors, intermediaries, and other stakeholders eager to comprehend products and compare their sustainability profiles.
Best data management practices: Widespread adoption of data management best practices is critical for success, streamlining oversight and content production – as well as for ensuring consistencies of disclosures between various fund documents and marketing material, another key element on the supervisory agenda.
This roadmap is ambitious but shows Luxembourg's agility to use its extensive fund management experience to keep our commitment to sustainability.
Source: Delano
