Luxembourg’s supervisory agency is one of a handful of National Competent Authorities (NCAs) taking a proactive step towards increased transparency around sustainability claims in the financial market. With sustainable finance being a priority for European Supervisory Authorities (ESA), it’s an example other jurisdictions should follow.
The end of the 20th century witnessed a great series of global advancements towards financial liberalisation. The sequential disappearance of monetary objectives pushed largely by market innovations and new control systems opened the gate for new priorities. Excessive risk-taking by banks, and an increased instability of the new financial environment that led to the Great Recession (2007–2009), clearly turned financial regulation into a strong political topic.
In parallel, as financial markets evolved and the link with the real economy became more tangible and tied to capital markets, investors’ protection has consistently continued to emerge as a key priority. This helped convey a further element of confidence in the markets, while drawing greater attention to the way different stakeholders operate. Over the past decade, the European Commission (EC) has strongly articulated its regulatory policy targets for a single policy objective, and that is the creation of a “financial system that serves the economy and facilitates sustainable economic growth”. The concept of ‘sustainable economic growth’ took a more specific connotation in 2015 when the EC started to take the necessary steps to embed sustainability in the Capital Markets Union (CMU), leading to the emergence of sustainable finance. The subsequent legislative evolution in this domain has been one of unprecedented proportions, and is progressively and irremediably changing the way financial market participants conduct themselves.
Driving accountability across the financial value chain
At European level, regulatory conduct and supervision is entrusted to the three European Supervisory Authorities (ESAs), which are in charge of drafting the technical standards formally adopted by the EC. In turn, member states remain responsible for frontline supervision through the role of the National Competent Authorities (NCAs). The latter hold the administrative responsibility and supervise the different categories of financial institutions and their ecosystems – in particular, consumers and their protection.
Investors’ protection involves guarding against a series of fraudulent or misleading practices involving all actors in the financial value chain.
Sustainability in the financial spotlight
Sustainable finance is underpinned by a series of specific regulations, and Sustainable Finance Disclosure Regulation (SFDR) is the one that is grabbing most of the financial market participants’ attention and, in particular, those that are active in Europe with some involvement in sustainable finance.
Aimed at improving transparency in financial markets, the SFDR is a European regulation to prevent greenwashing, and to increase transparency around sustainability claims made by financial market participants.
Though to a great extent the NCAs target the same audience, each have put special emphasis on certain aspects and roles when it comes to sustainability or sustainable finance. Sustainable finance, as one of the priorities of the ESAs, is cascaded to the NCAs who are, in turn, helping with local implementation and supervision on the basis of specific supervisory briefings.
Leading the charge in regulating sustainable finance
While the SFDR alone has kept NCAs quite busy, some NCAs have taken a proactive role, becoming key actors in this latest regulatory chapter, evidenced by their plans to build specific methodologies and solutions not only to supervise but also to support financial market participants in their work.
This is certainly the case for the Commission de Surveillance du Secteur Financier (CSSF), the supervisory agency in Luxembourg, which has been making sustainable finance (and, in particular, SFDR) one of its main supervisory tasks since it became applicable in March 2021.
In its latest publication detailing its supervisory priorities, the CSSF again stressed the importance of applying a gradual approach to its supervisory role, and further described its role with the concerned investment firms. In order to facilitate and promote transparency and disclosure, the CSSF will establish a self-assessment questionnaire about the investment firms’ disclosure obligations under SFDR. This should serve as guidance for the implementation of the technical standards on environmental, social and governance (ESG) risks. Particular attention shall be given to the risk management and governance of entities, and the focus will be placed on the recognition of ESG risks in both strategies and governance structures, ensuring close alignment with internal risk management.
Furthermore, for asset managers and issuers, the CSSF will also develop a framework to facilitate investment in line with the EU taxonomy regulation. This shall facilitate the compliance verification of all SFDR-related disclosures.
Amid all the changes financial market participants and the broader ecosystem are faced with, one priority remains essential: collaboration. At European level, the ESAs promote it, and it’s refreshing to see when it translates into concrete actions at national level, truly empowering positive change.
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