Update : CSSF sets the course for the supervision of Sustainable Finance

Fani Xylouri
Fani Xylouri
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Implementing the Sustainable Finance Framework

The CSSF’s central goal is to ensure a harmonized implementation of the sustainable finance framework across the financial sector, while also embedding Environmental, Social, and Governance (ESG) criteria into its supervisory procedures. Acknowledging the dynamic regulatory landscape, the CSSF will progressively integrate relevant adjustments into its oversight process. However, the responsibility for adhering to applicable requirements lies with the supervised entities and their board members. They are expected to prioritize the integration of ESG factors into their governance, risk management, and compliance tools.

In this context, the CSSF has outlined specific supervisory priorities for credit institutions, asset management firms, investment firms, and issuers. Additionally, it emphasizes the adoption of a risk-based approach in its supervision efforts.


Priorities for financial market players

For credit institutions, the focus continues to lie in three main areas: transparency and disclosures, risk management and governance, and MiFID rules related to sustainability. The CSSF has communicated that after the application of the SFDR regulatory technical standards (SFDR RTS), it will carry out additional off-site reviews of SFDR website disclosures at both the entity and product level, using a sample-based approach.

In July 2024, the European Securities and Markets Authority (ESMA) will initiate a Common Supervisory Action (CSA) specifically targeting the integration of sustainability within firms’ suitability assessment and product governance processes. In this context, the CSSF will conduct off-site and on-site inspections of a selected group of credit institutions and investment firms, with a particular focus on climate-related and environmental risks, as outlined in Circular CSSF 21/773. Additionally, the MiFID on-site inspection team will update its internal control plan to encompass the SFDR product disclosure requirements applicable to supervised entities offering discretionary portfolio management services.

Furthermore, the CSSF anticipates conducting a sample-based review of remuneration policies and practices to assess how these policies have been adjusted to ensure alignment with the integration of sustainability risks. Lastly, the CSSF will evaluate the industry’s practical implementation of the sustainability-related MiFID rules.

In the asset management industry, the CSSF's supervisory priorities encompass, as before, organisational arrangements of Investment Fund Managers (IFMs), verification of compliance with pre-contractual and periodic disclosures, verification of the consistency of information in fund documentation and marketing material, verification of the compliance of product website disclosures, and the portfolio analysis. The CSSF will continue its vigilance over Investment Firms (IFMs), ensuring their adherence to the SFDR, the SFDR RTS, and the Taxonomy Regulation while incorporating sustainability risks into their operations.

In August 2023, the CSSF released a Thematic Review focusing on the implementation of sustainability-related provisions within the investment industry. It emphasized that IFMs, during their ongoing assessment of compliance efforts, should duly consider the outcomes of this review.

Furthermore, the CSSF highlighted the CSA initiated by ESMA in collaboration with National Competent Authorities across the EU. This CSA follows a two-stage process: the first stage, launched in August 2023, closely examines greenwashing risks. The second phase, set to begin in Q1 2024, focuses on integrating sustainability risks and factors into the organizational arrangements of UCITS Managers and AIFMs, as well as enhancing transparency disclosures at the IFM and product level.

Investment firms continue to be subject to the supervisory priorities of transparency and disclosures, risk management and governance, and MiFID rules related to sustainability. Notably, the CSSF has stressed that it will ensure that investment firms adhere to disclosure obligations under the SFDR. 

To achieve this, the CSSF has revised the framework for the long-form report applicable to investment firms, aligning it with the supervisory and prudential priorities of the CSSF. This updated framework will be implemented in two stages:

·         For the financial year ending 31 December 2023, all Class 2 Investment Firms (IFs) incorporated under Luxembourg law, including their branches and certain Class 3 IFs, will be required to submit the revised long-form report.

·         For financial years ending after 31 December 2023, all investment firms must submit the revised long-form report following Circular CSSF 24/853.

Furthermore, the ESMA guidelines on MiFID II Suitability requirements and MiFID II product governance requirements, which have been in effect since 3 October 2023, have been fully integrated into the CSSF’s administrative practices and regulatory approach under the provisions of Circulars CSSF 23/835 and CSSF 23/840. These provisions equally apply to credit institutions.

For issuers, the CSSF has emphasized the entry into force of Directive (EU) 2022/2464 as of 1 January 2024 for the annual reports published in 2025 by issuers currently reporting under the Non-Financial Reporting Directive (NFRD). This transition will necessitate significant preparation from issuers to implement the new requirements.

As the Corporate Sustainability Reporting Directive (CSRD) is phased in over the next few years, the scope of issuers falling within its purview will ultimately be much broader than that of issuers currently covered by the NFRD. To assist issuers in meeting these new obligations, the CSSF has published a gap analysis on 2 February 2024. This analysis provides a preliminary understanding of the remaining gaps that need to be addressed by issuers during the transition from the NFRD to the CSRD in terms of sustainability disclosures.


Luxembourg as the 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), the 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 largely build upon the themes that were outlined in last year’s communiqué. By proactively tackling the implications of climate change and advocating for the incorporation of ESG factors into financial institutions’ operations, the CSSF is actively fostering a robust and sustainable economy. This commitment not only contributes to the global fight against climate change but also promotes social responsibility.



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.