Weight methodology of asset managers for their holdings in a portfolio to report Taxonomy-eligible assets
On 6 October 2022, the European Commission launched an additional FAQ with the purpose of clarifying the content of the Disclosures Delegated Act under Article 8 of the Taxonomy Regulation and the reporting obligations of eligible economic activities and assets (“DDA FAQ”).
The DDA FAQ provides that Article 8 of the Taxonomy Regulation applies to undertakings covered by NFRD meaning large public-interest entities to which certain AIFMs may also be subject (i.e. at least 500 employees, total assets of EUR 20 million and/or net turnover of EUR 40 million during the financial year). Such entities should not weight their holdings in a portfolio to report Taxonomy-eligible assets by the stake in the undertaking’s equity, debt or enterprise value including cash. It is weighted by the value of the exposures in the total assets of the asset manager.
For example, where an asset manager is exposed to two assets: — EUR 100 million equity in 100% eligible company A; — EUR 100 million bond in 0% eligible company B = EUR 200 million total assets. This means: 50% eligibility over total assets = (100 × 100% + 100 × 0%) / 200.
Adoption of the Taxonomy Delegated Act on nuclear and gas energy activities considered as green energy
On 31 October 2022, the European Commission finally adopted the Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities in respect of the content and presentation of information in relation to disclosures in pre-contractual documents (i.e. issuing documents/private placement memoranda) and periodic reports. It has been noted earlier that the Taxonomy Regulation aims to boost green investments and prevent ‘greenwashing’ by providing guidance to investors on economic activities that can be considered environmentally sustainable. The criteria for the specific gas and nuclear activities are then in line with EU climate and environmental objectives. The European Commission believes that gas and nuclear activities will help accelerating the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future.
CSSF extends the visa stamp process for updating the issuing document with regard to RTS
On 9 November 2022, the CSSF provided a communication on pre-contractual disclosure SFDR RTS requirements to support the update on sustainability-related disclosures. Further to the CSSF earlier publication issued on 6 September 2022, the CSSF specified the obligations relating to the filing of precontractual documents and periodic reports. As for the precontractual documents and the FMPs (i.e. Luxembourg-based UCITS, SIFs, SICARs and UCIs Part II) who do not have already submitted their updated prospectuses or other issuing documents, as requested in the RTS, the CSSF further specified that it expected to receive the latter electronically by 31 October 2022.
As the deadline expired, the CSSF invited AIFMs in their mission of transparency of environmentally sustainable investments to follow the instructions set forth in communication of 6 September 2022, meaning that requests to the CSSF for visa stamping of the AIF prospectus/issuing document must be accompanied by the confirmation letter.
ESAs call for evidence on greenwashing
On 15 November 2022, the ESAs initiated a call for evidence on greenwashing, seeking input on potential greenwashing practices within the context of applying the SFDR.
Further to the increasing requests for sustainability-related products and fast-evolving regulation regimes, the risk of providing investors with misleading or outright false information about the environmental impact of the offered investments continues to grow.
Hence the ESAs’ call for evidence seeking input from stakeholders and gathering information on the scale of greenwashing and identifying areas of high risk for greenwashing.
ESAs guidance on PAI and Taxonomy alignment in pre-contractual documents, website information and periodic reporting
On 17 November 2022, the joint committee of the ESAs issued a new Q&A to bring some clarifications and confirmations on disclosure requirements further to the SFDR CDR (“SFDR CDR Q&A”).
SFDR CDR Q&A is divided into the following 6 categories, each with its related key information:
1. Current value of all investments in PAI and Taxonomy-aligned disclosures: The concept of ‘all investments’ is used in the PAI disclosure and in the calculation of Taxonomy- alignment, hence FMPs attach particular attention to this notion.
- In terms of PAI disclosure, 'all investments' should be understood to mean both direct and indirect investments funding investee companies or sovereigns through funds, funds of funds, bonds, equity instruments, derivative instruments, loans, deposits and cash or any other securities or financial contracts. With that respect, further considerations need to be taken into account by AIFMs, managers of venture capital funds and managers of social entrepreneurship funds, meaning that 'all investments' should be considered as all Assets under Management (AuM) resulting from both collective and individual portfolio management activities. For banks or investment firms providing portfolio management or investment advice services, 'all investments' should include all the securities and financial contracts (which should be considered to include cash and cash equivalents) held by credit institutions and investment firms as part of the mandates given by their clients.
- In terms of Taxonomy-alignment calculation, ‘all investments’ should include all types of securities or financial contracts, while the market value of all investments is the sum of all assets held by the financial product.
- Whether or not the financial product's investment management is delegated, the ESAs want the PAI- disclosure to include all investments.
2. PAI disclosures:
- Calculation of the value should rely on data from investee or obtained by carrying out additional research with a third party or external experts.
- FMPs shall publish on their websites, where they consider PAIs of investment decisions on sustainability factors, a statement on due diligence policies with respect to those PAIs. In this statement, FMPs should disclose whether the investment decisions are made through financial products or in any other way.
3. Financial product disclosures:
- The SFDR CDR Q&A recalls that FMPs wishing to comply with Article 6 SFDR have the responsibility to explain concisely the reasons of not integrating potential sustainability risks deemed not to be relevant.
- FMP should not apply different interpretations of “sustainable investments” for different financial products that it makes available.
- While doing its SFDR assessment, a financial product disclosing under Article 8 SFDR may use reference metrics, such as UN Global Compact, OECD or ILO principles, but this use is not prescribed. However, it could form part of the “policy to assess” the management structures, employee relations, remuneration of staff and tax compliance.
4. Multi-option products: The SFDR CDR Q&A confirms that a multi-option product (MOP) with only one investment option falls under Article 5 of the Taxonomy Regulation (TR) when all of the underlying options offered have sustainable investment as their objective and at least one investment option invests in an economic activity that contributes to an environmental objective. 5. Taxonomy-aligned investment disclosures:
- Article 9 SFDR provides that financial products that are partly Taxonomy-aligned should disclose how Taxonomy-aligned investments do not significantly harm environmental or social objectives by taking into account the indicators on principal adverse impacts.
- The SFDR CDR Q&A provides guidance on the situations under which precontractual and periodic taxonomy alignments disclosures apply and assist preparers of financial product disclosures under Article 8 SFDR regarding the minimum extent to which sustainable investments with an environmental objective are aligned to the EU Taxonomy.
- Where a financial product reports on the Taxonomy-alignment of its investments in real estate or infrastructure assets, and not financial instruments, the financial product should be able to refer to the market value of these assets. All other rules to calculate the Taxonomy-alignment in Article 17 of the Delegated Regulation of an investment apply identically.
6. Financial advisers and execution-only FMPs: Among other things, the SFDR CDR Q&A defines the scope of financial advisers and limits their obligations to the context of advice provision.
ESMA draft guidelines on investments funds’ names using ESG or sustainability-related terms
On 18 November 2022, the ESMA published a consultation paper on guidelines with respect to the use of ESG or sustainability-related terms in investment funds’ names (the “Consultation”) in response to the risk of greenwashing developed by this practice.
The purpose of these guidelines is to specify criteria, to assess whether the name of a fund containing terms, acronyms or abbreviations suggesting that the fund focuses on investments that have, or investments whose issuers have, ESG or sustainability features, are fair, clear and not misleading. An investment fund's name serves as a means of introducing the investment fund to potential investors and serves as a crucial marketing tool for the promoters and may have significant impact on the decision making of prospective investors whether to invest into a particular fund or not and can be misinterpreted if the name of the fund contains misleading terms.
According to the Consultation applicable to all fund documentation and marketing communications for AIFs, there are two quantitative thresholds that apply based on the name used for the fund:
(i) If the name includes any “environmental, social, and governance (ESG)” or "impact investing" or any other “impact” related words, a minimum of 80% of the fund's investments should be used to meet environmental or social characteristics or sustainable investment objectives.
(ii) If the name includes the word "sustainable" or any other word related to sustainability, the fund should allocate at least 50% of its minimum proportion of sustainable investments within the 80% of investments that are used to meet environmental or social characteristics or sustainable investment objectives.
The Consultation also applies to investment funds which designate an index as a reference benchmark and use ESG or sustainability-related terms.
CSSF communication on MiFID ESG product governance requirements
On 24 November 2022, the CSSF published a communication regarding the product governance requirements relating to MiFID related sustainability rules (the “Communication”).
The CSSF reminds supervised entities of the application as from 22 November 2022 of the Grand-ducal Regulation on protection of financial instruments and therefore recalls that MiFID entities including investment advisory providers and discretionary portfolio management services are required to consider sustainability factors when specifying the target markets for the financial instruments and structured deposits they manufacture and/or distribute, as of 22 November 2022. The Communication also serves as a reminder that MiFID firms are required to obtain specific information on their clients' preferences regarding sustainability, meet those preferences, and take into account their clients' other investment objectives, financial situation, and knowledge and experience.
CSSF FAQ for investment funds disclosing under articles 8 and 9 SFDR
On 2 December 2022, the CSSF issued a FAQ on SFDR (the “FAQ”) which should be read in conjunction with the Q&As issued by the European Commission on 14 July 2021 and on 25 May 2022, clarifications brought by the ESA and the various CSSF communications as specified in the FAQ.
The FAQ provides additional information and clarifications on various aspects of the SFDR, including updates to prospectuses and issuing documents, website disclosures, pre-contractual disclosures, and periodic disclosures.
As for updates to prospectuses and issuing documents, the FAQ states that changes made to the SFDR's pre-contractual templates for Article 8 and 9 AIFs (funds promoting environmental or social characteristics and those with sustainable investment as their objective) must follow the same rules as other changes to prospectuses and issuing documents. It means that the integration of Article 8 and Article 9 SFDR RTS pre-contractual templates (the “Templates”) into the prospectuses and issuing documents does not require the prior approval of the CSSF, unless there are changes to these Templates.
The FAQ also specifies that certain changes to the Templates, such as minimum committed percentages, binding elements of the investment strategy, and benchmark figures, may be considered material changes which require assessment by the CSSF on a case-by-case basis in compliance with Circular CSSF 14/591.
If a change is considered a material change, Circular CSSF 14/591 requires a one month prior notification of such change to the investors.
The FAQ also clarifies the responsibilities of investment fund managers for website disclosure obligations under the SFDR. It indicates that AIFMs must ensure that all relevant information required by the SFDR is made available on their website or another website and must provide cross references from their website to the relevant website where this information can be found.
It also:
- clarifies the role of the depositary in monitoring the compliance of investment restrictions,
- provides further information on the criteria for 'sustainable investments' for Article 9 AIFs which must apply during the life cycle of the fund, and
- details the only exclusion strategies for Article 8 AIFs permitted provided there is a detailed exclusion strategy and not permitted for Article 9 AIFs.
The FAQ provides that the minimum thresholds of investments disclosed in the fund documentation (for instance, minimum threshold of investments to meet the environmental or social characteristics promoted by investment funds) shall be considered to be binding commitments to the investment strategy of the investment fund.
With respect to periodic disclosures requirements, the FAQ mentions that annual reports of investment funds disclosing under Article 8 and/or 9 SFDR must comply with the product disclosure requirements in periodic reports laid down in Article 11 SFDR.