Advisory

CSSF sets the course for the supervision of Sustainable Finance

Fani Xylouri
By:
Fani Xylouri
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Contents

Implementing the Sustainable Finance framework

As the world grapples with the impacts of climate change, financial institutions and regulatory bodies increasingly recognise the importance of integrating sustainability into their operations. In response to this growing need, Luxembourg's Commission de Surveillance du Secteur Financier (CSSF) has recently outlined its supervisory priorities in sustainable finance, demonstrating its commitment to shaping a more environmentally and socially responsible financial sector.

The CSSF's primary objective is to ensure a cohesive implementation of the sustainable finance framework across the financial sector while integrating Environmental, Social, and Governance (ESG) requirements into its supervisory practices. Recognising the evolving nature of the regulatory landscape, the CSSF will gradually incorporate relevant changes into its supervision process. However, responsibility for compliance with applicable requirements remains with the supervised entities and their board members. They are expected to prioritise integrating ESG factors into their governance, risk management, and compliance tools.

In this context, the CSSF has set specific supervisory priorities for credit institutions, asset management firms, investment firms, and issuers.

 

Priorities for financial market players

For credit institutions, the focus lies in three main areas: transparency and disclosures, risk management and governance, and MiFID rules related to sustainability. The CSSF aims to ensure that credit institutions adhere to the disclosure obligations outlined in the SFDR Regulation. Additionally, it plans to review the level of alignment of the banking sector with its expectations regarding the management of climate-related and environmental risks, as outlined in Circular CSSF 21/773. Finally, the CSSF will assess the industry's practical implementation of the sustainability-related MiFID rules.

In the asset management industry, the CSSF's supervisory priorities encompass organisational arrangements of Investment Fund Managers (IFMs), verification of compliance with pre-contractual and periodic disclosures, consistency of information in fund documentation and marketing material, compliance of product website disclosures, and portfolio analysis. The CSSF will continue to monitor IFMs' compliance with the SFDR, the SFDR RTS, and the Taxonomy Regulation, ensuring they integrate sustainability risks into their activities.

Investment firms are subject to supervisory priorities that include transparency and disclosures, risk management and governance, and MiFID rules related to sustainability. The CSSF will gradually implement the supervision of ESG risks for investment firms, prioritising the recognition of ESG risks in their strategies and governance arrangements. It will also ensure that investment firms adhere to disclosure obligations under the SFDR and assess the practical implementation of MiFID rules related to sustainability.

For issuers, the CSSF has identified climate-related matters as a priority for both International Financial Reporting Standards (IFRS) financial statements and non-financial statements. It will also focus on the information required under Article 8 of the Taxonomy Regulation for relevant issuers, which requires them to disclose the alignment of their economic activities with climate change mitigation and adaptation objectives.

Luxembourg as hub of Sustainable Finance

Recognising the international and cross-cutting nature of sustainable finance, the CSSF aims to ensure Luxembourg's representation in national, European, and international groups driving sustainable finance initiatives. It supports the European Supervisory Authorities (ESAs) and international bodies such as the Basel Committee on Banking Supervision (BCBS), the European Financial Reporting Advisory Group (EFRAG), International Sustainability Standards Board (ISSB), and the Network for Greening the Financial System (NGFS) in promoting a coherent, cohesive, and consistent, sustainable finance framework.

In conclusion, the CSSF's supervisory priorities in sustainable finance mark a significant step towards fostering a more responsible and sustainable financial sector in Luxembourg. By actively addressing the challenges posed by climate change and promoting the integration of ESG factors into the practices of financial institutions, the CSSF is paving the way for a more resilient and sustainable economy, ultimately contributing to global efforts in combating climate change and promoting social responsibility.

Contact

If you wish to understand how you could best implement ESG matters into your governance, risk management and enhance your transparency on entity and product disclosures, please contact our Head of Sustainability & ESG Services Fani Xylouri.