The CSSF has alerted Luxembourg-based investment fund managers about the regulatory requirements arising from Regulation (EU) 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector, otherwise known as the SFDR, which will be applicable from March 10, 2021.

The Luxembourg regulator has announced on December 16, 2020 details of a fast-track approval system for updating funds’ prospectuses or offering documents to incorporate sustainability disclosures, one of the requirements under the regulation.

The SFDR requires managers of UCITS and alternative investment funds, along with other financial products, to comply with transparency rules on the incorporation of sustainability risks into their investment strategies, the consideration of potential adverse impacts, and the provision of other sustainability-related information.

No deferral of SFDR compliance

The European asset management industry had lobbied vigorously for the deferral by up to a year of the legislation’s provisions coming into force, because of the impact on the industry of the Covid-19 pandemic and notably an ongoing delay in publication of regulatory technical standards setting out details of how the regulation is to be interpreted and implemented.

The deadline for publication of the standards, at the end of 2020, will not be met because of an extension required to the public consultation period, the European Commission says. However, on October 20 the Commission announced that the application of the SFDR in March would not be conditional on the formal adoption and entry into force of the regulatory technical standards.

All deadlines for the SFDR therefore remain in force, but investment fund managers will be required to comply not with detailed standards but the high-level principle-based requirements set out in the regulation. This will entail more judgement-based decisions by both industry members and regulators.

Assessing impact of sustainability risks on strategy and returns

Article 6 of the SFDR requires managers to indicate how they integrate sustainability risks into their investment decisions and to assess and disclose the likely impact of such risks on the returns of a particular fund.

The sustainability risk assessment approach and related disclosures must be published in UCITS prospectuses as well as other fund offering documents. If the risk assessment leads to the conclusion that no sustainability risks are relevant for a fund, the reasons must be explained to investors, and managers must also disclose if they do not consider any adverse impact of investment decisions on sustainability factors for a fund.

Prospectuses of UCITS or offering documents of alternative funds qualifying as financial products that promote environmental or social characteristics, or a combination of them, according to Article 8 of the regulation, or that have sustainable investment as their objective under Article 9 may also need to be modified.

Disclosure to investors

The updating of disclosures requires prior categorisation of the sustainability characteristics or nature of the fund according to the SFDR where applicable, and related information, including the fund’s name, should not mislead end-investors by exaggerating the impact of sustainability in its investment policy. Sustainability risks must also be integrated into the manager’s risk management policy.

The CSSF requires managers to assess their situation with regard to the SFDR disclosure obligations and submit an updated UCITS prospectus or fund issuing document at the latest by February 28, 2021. This information should be provided to AIF investors under Article 6 (3) (a) of the SFDR.

Managers should also ensure they comply with requirements on the publication of information on their websites and the update of policies and processes relating to sustainability risk policies, the investment decision-making process, adverse impacts as defined under Article 4 of the SFDR and remuneration policies. They should take appropriate measures to remedy any gaps and ensure information remains up to date.

Fast-track procedure for fund prospectus updates

Disclosures required under Article 6 (3) (g) and, if applicable, Articles 7, 8 and/or 9 of the SFDR must be incorporated into UCITS prospectuses. Management companies are required to assess the new disclosure obligations and submit an updated prospectus for each Luxembourg UCITS they manage to the CSSF by February 28.

The CSSF has implemented a dedicated fast-track procedure to facilitate the submission of revised prospectuses or issuing documents to the CSSF, both for UCITS management companies and AIFMs submitting updates for SIFs and Part II funds. The facility is restricted to updates reflecting changes required under the SFDR; modifications to the investment policy and restrictions material according to CSSF Circular 14/591 cannot benefit from the fast-track procedure.

How does the fast-track process work?

Each updated prospectus or issuing document submitted must be accompanied by a letter providing confirmation of their conformity, as well as providing evidence that the investment fund manager has upgraded its policies and processes to comply with the SFDR.

A template of the confirmation letter is available on the CSSF website. It must be signed by at least one representative of either the UCITS ManCo, an investment company that has not designated a management company, AIFM or a legal advisor, or another representative of the manager or fund.

The updated prospectus or issuing document version submitted for approval by the CSSF must be uploaded in a clean version, in accordance with Circular 19/708 on electronic transmission of documents to the CSSF alongside with the confirmation letter, merged with the updated prospectus or issuing document in track-changes version. If a notice is planned to inform investors about the update, it must also be uploaded and submitted as a letter.

Upon acceptance by the CSSF, the prospectus or issuing document will be visa-stamped and returned through the e-file/Sofie channel. If the filing is deemed unsatisfactory, the manager or fund will receive a notice requesting the submission of a fresh revised version.

For further information, please contact Olivier Sciales at oliviersciales@cs-avocats.lu.