Sustainable Finance Disclosure Regulation: EU and Luxembourg updates

The Disclosure Regulation (EU) 2019/2088 ("SFDR") became applicable on 10 March 2021.

From that date, investment fund managers (“IFMs”) must publish ESG-related information on their website. They must also ensure that ESG information is provided (i) in the prospectus (for UCITS) and in disclosures to investors (for AIFs), and, depending on whether the fund promotes ESG characteristics or has a sustainable investment objective, (ii) in the fund’s annual report. This last obligation must, however, in principle be complied with from 2022 subject to a further possible clarification by the EU Commission that the reports targeted by the SFDR level 2 regulatory technical standards are not those established in 2022 but those covering a reporting period starting in 2022.

1. RECENT DEVELOPMENTS AT EU LEVEL

During February 2021, two important documents complementary to SFDR were published by the European Supervisory authorities (“ESAs”):

1. - The Final Report on draft Regulatory Technical Standards (“RTS”)  on SFDR;
2. - The Supervisory Statement on the application of SFDR.

In March 2021, a consultation was also published by the ESAs which aims at integrating in the RTS  taxonomy-related sustainability disclosure.

1.1. The Final Report on draft RTS on SFDR

On 2 February 2021, the ESAs delivered their Final Report on draft RTS under SFDR to the EU Commission (EC).

The RTS include rules on:

• The information to be provided at entity-level on the consideration of principal adverse impacts that investment decisions may have on sustainability factors (Article 4 of SFDR). A list of principal adverse indicators is provided in Annex I to the RTS. The list includes:
  • Mandatory indicators:
    • for investments in investee companies: nine climate and other environmental- related and five social, employee, human rights, anti-corruption or anti-bribery  matters;
    • for investment in real estate: two indicators;
    • for investment in sovereigns and supranationals: two indicators.
       
  • At least two opt-in indicators out of 40 (16 environmental; 24 social).
     
• The information to be provided at product-level on (i) the environmental and social characteristics referred to in Article 8 of SFDR and (ii) the sustainable objectives referred to in Article 9 of SFDR. Mandatory templates for both pre-contractual and periodic information are provided in Annexes II to V to the RTS.

These RTS must now be adopted by the EU Commission. Once adopted, the EU Parliament or the Council may object to the RTS within a period of three months from the date of notification of the RTS adopted by the EU Commission¹. 

The proposed application date of the RTS is 1 January 2022.

1.2. The ESAs’ Supervisory Statement on the application of SFDR

In addition to their Final Report on the draft RTS, the ESAs issued a Supervisory Statement on the application of SFDR on 25 February 2021, whereby:

• the ESAs encourage the National Competent Authorities (“NCAs”) to refer financial market participants (i.e. IFMs and financial advisers among others) to the requirements set out in the draft RTS during the interim period between 10 March 2021 (SFDR application date) and 1 January 2022 (expected application date of the RTS);
• while insisting on the fact that the RTS are not yet final, the ESAs recommend NCAs to encourage financial market participants and financial advisers to use the interim period from 10 March 2021 until 1 January 2022 to prepare for the application of the RTS.

Guidance on the application timelines of some specific provisions of SFDR, in particular on the application timeline for entity-level principal adverse impact disclosures and for financial products’ periodic reporting is provided in the Annex to the Supervisory Statement. In addition, the Annex includes a summary table of the relevant application dates of SFDR, of the Taxonomy Regulation and the RTS.

On the subject of financial reporting in particular, the ESAs underline the difficulties associated with applying this obligation to any financial period commencing before 1 January 2022, especially if the RTS are not finalised and published by the end of June 2021. Accordingly, the ESAs recommend the EU Commission to clarify that the reporting requirements and the use of the reporting template foreseen by the RTS should only apply to any reporting period beginning from 1 January 2022. The periodic reports published in 2022 in relation to reference periods starting before 1 January 2022 would therefore only apply the high-level and principle-based requirements in Article 11(1) of the SFDR.

1.3. New consultation of the ESAs on taxonomy-related sustainability disclosures

On 15 March 2021, the ESAs published a new consultation on taxonomy-related sustainability disclosures (JC 2021 22). This consultation includes additional disclosure requirements which will apply to:

• Article 8 (SFDR) investment funds which promote environmental characteristics and also make environmentally sustainable investments that are aligned with the Taxonomy Regulation (EU) 2020/852 (“Taxonomy Regulation”);
• Article 9 (SFDR) investment funds which make environmentally sustainable investments that are aligned with the Taxonomy Regulation.

As a result, the draft RTS included in the ESAs Final Report dated 2 February 2021 will be amended in order to require disclosure of information on:

• The environmental objective(s) set out in the Taxonomy Regulation contributed to;
• The extent to which and how economic activities invested in are taxonomy-aligned.

Some specific revisions to the pre-contractual, website and periodic disclosures are also proposed by the ESAs.

A new draft consolidated RTS is attached to the consultation.

The deadline for responding to the consultation is 12 May 2021.

Should this new draft RTS already be considered by the industry?

The new version of the RTS is currently under consultation and the responses to it will have to be considered by the ESAs before the final draft consolidated RTS is submitted to the EU Commission for adoption. However, it would be advisable to already take a look at it in order to anticipate the requirements that will apply to financial products (including investment funds) which make environmentally sustainable investments.

2. UPDATE ON SFDR APPLICATION IN LUXEMBOURG

2.1. CSSF press release 12 March 2021

On 12 March 2021, the CSSF published a press release in respect of the application of SFDR and related RTS.

The reference made by the CSSF to the RTS concerns the RTS included in the Final Report published by the ESAs on 2 February 2021. In its press release, the CSSF refers to the ESAs’ Supervisory Statement and:

• Recommends financial market participants and financial advisers to use the interim period from 10 March 2021 until 1 January 2022 to prepare for the application of the RTS;
• Encourages financial market participants and financial advisers to use the draft RTS as a reference for the purposes of applying the provisions of SFDR in the interim period until RTS are adopted by the European Commission.

The CSSF provides guidance on the application timeline for entity-level principal adverse impact statement and for products’ periodic reporting.

The CSSF also indicates in its Press Release that it awaits the answer from the EU Commission to the letter published by the ESAs on 7 January 2021 in respect of priority questions pertaining to SFDR, including:

• the application of SFDR to non-EU AIFMs and registered AIFMs;
• the meaning of "promotion" in the context of products promoting environmental or social characteristics (Article 8 of SFDR);
• the application of Article 9 of SFDR (i.e. financial products which have a sustainable investment objective); and
• the application of SFDR product rules to MiFID portfolios and dedicated funds.

At the date of this Newsletter, no response from the European Commission has been received yet.

2.2. Budget Law for 2021: Reduced subscription tax (taxe d’abonnement) for UCIs investing in environmentally sustainable investments

Luxembourg is willing to maintain and reinforce its position as a pioneer in sustainable finance.

Against this background, the tax provisions section of the Law of 17 December 2010 on undertakings for collective investment (applicable to UCITS and Part II UCIs²) has been recently amended. Reduced subscription tax rates (compared to the usually applicable 0.05% rate) are now applicable to the portion of the net assets of a UCI, or a compartment thereof, invested in economic activities that qualify as environmentally sustainable within the meaning of Article 3 of the Taxonomy Regulation ("Qualifying Activities").

For a UCI, or a compartment thereof, that invests at least 5% of its nets assets in Qualifying Activities, a reduced tax rate at 0.04% applies to the portion of the net assets invested in Qualifying Activities.

The tax rate is reduced to 0.03% for a UCI investing at least 20% of its net assets in Qualifying Activities, to 0.02% for a UCI investing at least 35% of its net assets in Qualifying Activities and to 0.01% for a UCI investing at least 50% of its net assets in Qualifying Activities. The reduced rate applies only to the portion of the net assets invested in Qualifying Activities.

For UCIs willing to benefit from such reduced rates, the part and percentage of net assets invested in Qualifying Activities on the last day of the UCI's financial year shall be controlled and certified by an approved statutory auditor and published in the annual accounts or in an assurance report.

A statement certified by the approved statutory auditor containing the relevant percentage must be filed with the Luxembourg indirect tax authorities when filing the first subscription tax return following the finalisation of the annual report or the assurance report. This percentage will form the basis for determining the tax rate applicable to the portion of the net assets invested in Qualifying Activities for the 4 quarters following the filing of this statement.

During a transition period ending on 1 January 2022, UCIs willing to benefit from the reduced subscription tax rates (during 2021) must electronically file their quarterly return at the rate of 0.05% together with a corrective statement based on a form that will be made available by the Luxembourg indirect tax authorities.

2.3. Bill of Law 7774: Implementation of the SFDR and the Taxonomy Regulation in Luxembourg

In view of the implementation of the SFDR and the Taxonomy Regulation in Luxembourg, a new Bill of Law was introduced on 3 March 2021 (Bill of Law 7774).

This Bill aims at appointing the CSSF as supervisory authority for the compliance with the SFDR and the Taxonomy Regulation by financial market participants (including IFMs) and financial advisers under its supervision³. It defines the supervisory and investigative powers necessary for the performance of its supervisory duties and gives the CSSF the power to impose administrative sanctions.

Since the SFDR and the Taxonomy Regulation essentially provide for disclosure obligations, the investigatory powers granted to the CSSF include the power to order financial market participants and financial advisers to publish information and to require, if necessary, the publication of a correction notice. In addition, the CSSF may call upon external experts to conduct audits or investigations.

As regards the administrative fines, the Bill proposes, in accordance with the principle of proportionality, to limit the fine that the CSSF may impose to a maximum of 250,000 euros. Indeed, other laws of the financial sector to which financial market participants are subject, and in particular the AIFM Law, provide for a maximum of 250.000 euros.