Luxembourg: Pre‐contractual disclosures and information on the integration of sustainability risks

In brief

Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (hereinafter “SFDR”) aims to provide transparency on sustainability within the financial markets in a standardised way by ensuring comparability and impeding greenwashing.


Preliminary remarks

SFDR requires financial market participants (the “FMPs” or a “FMP”) and financial advisers to consider sustainability from a number of perspectives taking into account both internal (by development and update of internal policies, integration of sustainability into investment decisions) and external considerations (assessment on how investments impact on sustainability factors). The definition of FMPs under Article 2 of SFDR is rather broad and includes inter alia all alternative investment fund managers, management companies of undertakings for collective investment in transferable securities, investment firms which provide portfolio management services, insurance undertakings which make available an insurance‐based investment product and institutions for occupational retirement provision . SFDR also applies to financial advisers , which include different firms providing investment advice.

SFDR maintains the requirements for FMPs and financial advisers to act in the best interest of end investors, including, among others, the requirements to conduct adequate due diligence prior to making investments as provided for in various pieces of sectoral legislation . In order to comply with their duties under such rules, FMPs and financial advisers are expected to integrate into their processes (including their due diligence processes), and assess on a continuous basis, not only financial risks but also relevant sustainability risks that might have a material negative impact on the financial return of an investment or advice. Under Article 2 of SFDR, a “sustainability risk” is defined as an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment. The reference in the definition to an actual or potential material impact leaves the task to each FMP/investment adviser to assess those risks which may have a material impact on the financial performance of an investment product.

SFDR contains various transparency requirements on sustainability to be disclosed to investors at different levels – both at the FMPs/financial advisers’ level, as well as at the financial product-level. At the product level, pre-contractual information for investors must be implemented as of March 10, 2021.

Depending on the category an FMP or financial adviser is part of and the product itself, pre-contractual disclosures as referred to in Article 6 (3) of SFDR could mean, for example, a prospectus, an offering document, a placement memorandum (or another document or instrument as referred to in Article 23 (1) of Directive 2011/61/EU on alternative investment fund managers) or the information provided to clients by investment firms under Directive 2014/65/EU of 15 May 2014 on markets in financial instruments.

In the early days of SFDR, one critical question was how to design adequate wording addressing the requirements of the European legislator, which meets the expectations of investors while maintaining flexibility in terms of procedures and investment policy. A few months have elapsed since the entry into force of the main provisions of SFDR and this is still an ongoing issue. The purpose of this article is to present the disclosure requirements under SFDR under Articles 6, 8 and 9 and summarise the few lessons we have learnt so far.

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This article is a contribution from our lawyers in the Green Ethica book published by Legitech in collaboration with in collaboration with EFPA Luxembourg

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