Sustainable Finance Regulation

Sustainable finance refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions. Sustainable finance has become a very popular topic, raising awareness within the new generations.  Luxembourg’s green finance market has been integrating sustainability considerations into financial policies.

Following the adoption of the  Paris agreement on climate change under the United Nations Framework Convention on Climate Change (the “Paris Climate Agreement”), the European Commission has expressed in the ‘Action Plan: Financing Sustainable Growth’ its intention to clarify and increased transparency in the field of sustainability risks and sustainable investment opportunities. In March 2018, the European Commission created the High-Level Expert Group on Sustainable Finance to develop an action plan that included concrete measures in terms of sustainable economic activities and Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“ESG Regulation”) was approved to create harmonised rules on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts and the provision of sustainability‐related information with respect to financial products.

The ESG Regulation is supplemented by the Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (“Taxonomy Regulation”).

In this scenario, Luxembourg has positioned itself as one of the first countries in the European Union (EU) to put into practice all these new criteria in the field of sustainable finance. One proof of this last statement is the Luxembourg Green Exchange (LGX), which has been considered the biggest platform dedicated to sustainable finance instruments. Also, taking the fact that Luxembourg has been awarded second place in green finance quality by the Global Green Finance Index, it is clear that investors who list their green financial instruments in Luxembourg benefit from an established infrastructure, know-how and market recognition.

UCITS management companies, authorised alternative investment fund managers, portfolio managers and investment advisors among others will need to make certain disclosure requirements in their websites, update their internal policies when they consider ESG factors and include ESG in their ongoing reporting. They should also ensure that the prospectuses or precontractual arrangements of the UCITS and alternative investment funds that they manage are updated by March 10, 2021. CSSF has habilitated a fast-track procedure for filing prospectuses whose changes relate to ESG without any other material changes. Prospectus should be sent for VISA before February 2021.

The ESG Regulation will now be further developed by Regulatory Technical Standards that will provide guidance as to the requirements on the content and presentation of disclosed information and transparency as well as the methodologies, providing more certainty and standardisation across the industry. But financial market participants and advisers should already consider:

  • if their decision‐making process integrates sustainability risks, to provide information on the manner in which they are integrated and the results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available;
  • whether they take into account principal adverse impacts of investment decisions on sustainability factors and their due diligence processes/policies;
  • their remuneration policies, as they would need to be consistent with the integration of said sustainability risks;
  • if they promote, environmental or social characteristics, how those characteristics are met or if an index has been designated as a reference benchmark, how this index is consistent with those characteristics;
  • if the fund has sustainable investment as its objective how that objective is to be attained, or in case they follow an index how the index is aligned with that objective as well as the methodologies used to assess, measure and monitor the environmental or social characteristics or the impact of the sustainable investments;
  • if the fund has a reduction in carbon emissions as its objective, in view of achieving the long‐ term global warming objectives of the Paris Agreement.

Financial market participants and advisers shall make the necessary disclosures in the prospectuses, websites, update their policies when needed and include information on their ongoing reports.

You are welcome to join us in our next webinar to be held on February 8, 2021 at 4 p.m. CET and discuss ESG implications in more detail.