Regulation · Sustainability

CSSF says SFDR thresholds imply ‘binding commitments’

CSSF says SFDR thresholds reflect ‘binding commitment‘

Luxembourg’s financial supervisor CSSF has made clear that it expects investment funds that commit to sustainability objectives will stick to these commitments. If a fund defines thresholds for specific ESG or sustainability investments, then it should consider these as a “binding commitments”.

A 15-page Q&A document that CSSF published on Friday seeks to lift some of the confusion regarding sustainable investment funds. It provides more guidance to fund managers when it comes to investment funds classified as sustainable under the EU’s Sustainable Finance Disclosure Regulation, known as SFDR. 

A little more than half of all investment funds in Europe currently is classified as either Article 8, sometimes referred to as ESG, “green” or sustainability funds, or as Article 9, considered the most sustainable, “dark green” category of fund investments in companies that seek to achieve a positive impact in terms of ESG or climate change.

Expected to stick to commitments

CSSF now has made clear that when a fund, in its prospectus or other fund documents, commits to a certain investment threshold, it is expected to stick to that commitment. 

“Minimum thresholds of investments shall be considered as binding commitments of the investment strategy of the fund,” CSSF said. The investment fund managers “must ensure ongoing compliance with all the rules laid down in the prospectus/issuing document of the funds they manage, with the depositary being in charge of the independent monitoring of the compliance of investment restrictions as per applicable legal provisions related to obligations of depositary oversight.”

Amid a lack of guidance from the EU, fund managers across Europe had been left to make their own interpretations of criteria defining the most sustainable Article 9. In recent months it has become increasingly clear that financial supervisors will set firm sustainability and/or ESG criteria in particular for Article 9 funds.

Pure exclusion strategy not allowed for Article 9

In its Q&A document, CSSF also made clear that Article 9 funds cannot be managed with a pure exclusion strategy. “For these funds, an exclusion strategy only is not acceptable,” it said. Article 8 funds however are permitted strategies based exclusively on excluding certain types of investments that are considered for example as unethical, harmful to society, or in breach of laws or regulations. 

“Should only an exclusion strategy be applied as a key element of the ESG strategy applicable to the relevant fund, the CSSF would expect the detailed exclusion strategy to allow investors to understand how the fund’s environmental and/or social characteristics are being met,” the supervisor said.

The bar clearly is higher for Article 9 funds, whose underlying assets must qualify as “sustainable investments,” CSSF said, referring specifically to Article 2 of the SFDR which defines such investments. “An exclusion strategy, which would be in line with the investment strategy and the binding positive investment selection process of the fund, can be used on top of the positive selection process.”

Defining sustainable investments:

Article 2 of the EU’s Sustainable Finance Disclosure Regulation:

“A sustainable investment is an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.”


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