On 2 December 2022, the Luxembourg supervisory authority for financial services (the “CSSF”) published FAQs on the application of the Sustainable Financial Disclosures Regulation[1] (“SFDR”) and its regulatory technical standards[2] entering into force on 1 January 2023 (the “RTS”).
The FAQ applies to alternative investment fund managers (“AIFMs”), management companies of undertakings for collective investment in transferable securities (“UCITS Management Companies”), managers of a qualifying venture capital fund (“EuVECA”) and managers of a qualifying social entrepreneurship fund (“EuSEF”), referred to as “financial market participants” (“FMP”).
The FAQ was published a few weeks after the publication of a Q&A on SFDR by the European Supervisory Authorities (the “ESAs”), bringing additional clarification and certainty on key points for the application of SFDR by the FMPs.
You will find below the key takeaways from the FAQ.
1. Clarification on “material change”
The question on the materiality of changes in relation to SFDR is usually raised in two aspects:
As a reminder, any material change, as defined under Circular CSSF 14/591, requires to notify the investors one month prior to the change during which they have a repurchase right or to obtain the consent from the investors.
In its FAQ, the CSSF clarifies that, forming an integral part of the offering document/prospectus, the information in the SFDR template is subject to the applicable laws and regulations. In that context, the materiality of the changes made to SFDR information should be assessed, pursuant to the definition of Circular CSSF 14/591. The CSSF further explains that changes in relation to (i) figures such as minimum committed percentages, (ii) the binding elements of the investment strategy and/or (iii) benchmark can be considered as material change(s).
The FAQ also confirms that the mere introduction of the templates in order to comply with the SFDR RTS requirements does not qualify as a material change, although the CSSF reserves the right for a materiality assessment on a case-by-case basis.
- whether the changes made to SFDR disclosures in the offering documents/prospectuses may be considered material; and
- whether the update of the offering documents/prospectuses to comply with the SFDR RTS requirements may be a material change.
2. The use of an exclusion strategy
The CSSF clarifies that the use of an exclusion strategy is enough to promote environmental and social characteristics, within the meaning of Article 8 SFDR, to the extent that the details on the exclusion strategy allows the investors to understand how this strategy is used to meet the environmental and social characteristics promoted by the product.
For funds disclosing under Article 9 SFDR, the sole application of an exclusion strategy is not sufficient as such funds must invest in “sustainable investments” which requires a positive investment selection process to meet the conditions of Article 2(17) SFDR.
Finally, the CSSF reminds FMPs that recital (16) of the SFDR RTS warns against greenwashing in the context of exclusion strategies. An important level of details would therefore be expected for funds promoting environmental and social characteristics by relying on their exclusion strategy only, notably on the description of the contractually binding elements.
3. Sustainable investments during the life-cycle of article 9 funds
The FAQ clarifies that “sustainable investments” made by funds disclosing under Article 9 SFDR must be qualified as such, in accordance with the conditions of Article 2(17) SFDR, at all times i.e. (i) at the date of the actual investments and (ii) on an ongoing basis during the life cycle of the fund.
This may have an impact for funds which intended to disclose under Article 9 SFDR because of their strategy to improve the ESG factors of investments which may not, at the time of their acquisition, meet the “do not significantly harm” principle.
4. Miscellaneous
The CSSF also took the opportunity of the FAQ to clarify other points such as:
- the confirmation that the minimum proportions of investments included in the SFDR annex are binding commitments.
- the publication of the website disclosures remains with the responsibility of the FMP even when the management of the portfolio is delegated to a third-party entity. In that context, the FMP must ensure that the information required under Article 10 SFDR is available on its website or another website in which case, cross-reference must be made from the FMP’s website to the relevant website where the disclosures are available.
- the annual disclosures issued as from 1 January 2023 must comply with the guidance given in the supervisory statement issued by the ESAs on 24 March 2022 and using the mandatory templates from the SFDR RTS.
This FAQ is mostly welcomed by FMPs which are in the process of updating the SFDR disclosures of their funds disclosing under Article 8 or Article 9 SFDR, although questions are still pending in front of the European Commission.
Aurélien Hollard
Partner | Avocat à la Cour
Julie Pelcé
Managing Associate
Julien Robert
Professional Support Lawyer | Avocat à la Cour
[1] Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector, as amended.
[2] Delegated Regulation (EU) 2022/1288 of 6 April 2022 providing regulatory technical standards on SFDR.
