SFDR targeted consultation – a wish list for Luxembourg funds

For Luxembourg funds complying with Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the SFDR), the targeted consultation and public consultation (the consultations) launched by the European Commission seeking feedback on the SFDR on 14 September 2023 may invoke hope or despair. Over the last couple of years, the gaps in legislation have been gradually filled by the European Commission, ESMA and the European Supervisory Authorities (ESAs) but there are still questions about how to improve the effectiveness of the SFDR in combatting greenwashing and driving investment in sustainable activities. Below we look at the consultations and how the proposed changes will affect funds domiciled and/or marketed in Luxembourg, considering which changes might be on the wish list for them.

Why is the SFDR important in Luxembourg?

The Sustainable Finance Disclosure Regulation (EU) 2019/2088 (the SFDR), which came into effect in March 2021, sets out how financial market participants, such as asset managers, should communicate sustainability information to investors. The SFDR is fundamentally a disclosure regulation and is not intended to act as a labelling regime (though there is evidence that it does in fact act as a de facto labelling regime).  Luxembourg is home to a large number of funds which comply with the SFDR and its disclosure requirements, so changes to the SFDR will have a profound effect on the Luxembourg market.

The turbulent fortunes of Article 8 and Article 9 funds

Since 2018, a number of delegated regulations accompanying the SFDR have been published as well as a number of regulatory technical standards which have supplemented the requirements of the SFDR.  There have been a lot of gaps in regulatory interpretation of the SFDR and financial market participants in scope for the SFDR have struggled to interpret many of the concepts included in the SFDR and the related interconnections with the Taxonomy Regulation (EU) 2020/852 with any certainty.

When the European Supervisory Authorities (the ESAs) “clarified” on 2 June 2022 that Article 9 funds should only contain “sustainable investments” (and cash and hedging assets), according to Morningstar more than 320 funds were subsequently changed from Article 9 to Article 8 from Q4 2022 to end of Q1 2023.

In response to the large number of downgrades (which was not the intention of the EU), the Commission clarified in its answers to questions on the interpretation of the SFDR in April 2023 that “financial market participants must carry out their own assessment for each investment and disclose their underlying assumptions”. This was calculated to bring some stability to the market, confirming that funds could use their own discretion to determine whether an asset was a “sustainable investment”, however the expected upgrading of previously downgraded Article 8 funds to Article 9 funds did not occur.  In addition, according to Morningstar data, “Article 9 funds attracted EUR 1.4 billion in Q3 2023, a new low”. One reason for the dearth of upgrades and lack of new money in Article 9 funds can be explained by the upgrading of Article 8 funds not being perceived as essential for investors. Another reason is that funds were mindful that the five year consultation on SFDR would be launched and they wanted to avoid “flip-flopping” between making Article 8 and 9 disclosures.

The consultations

On 14 September 2023, the European Commission published its targeted consultation and public consultation to seek views on the implementation of the SFDR (the consultations). For more detail, please see our publication here

These consultations pose a unique opportunity for Luxembourg funds to provide feedback to the regulators on their observations as to what works and does not work in the Luxembourg market.  Luxembourg funds are uniquely placed to report what their investors want to see from the SFDR to improve their investment experience, improve disclosure on funds and reduce greenwashing. 

For those same asset managers and owners in scope of SFDR, the last five years have brought continual adaptation and change as they have sought to comply with the letter and the spirit of the SFDR. More change may well be daunting as systems have already been built (at much expense) to integrate the existing requirements of the SFDR.

However, these consultations also provided an opportunity to:

  • ensure that the regulator understands how the markets work in practice
  • highlight shortcomings of the SFDR, improvements to address these and how it interacts with other parts of the European sustainable finance framework
  • whether there should be changes to the disclosure requirements and views on the use of Articles 8 and 9 of the SFDR as “de facto product labels”
  • encourage synergies and interoperability with the UK Financial Conduct Authority’s proposals for a UK financial product labelling regime
  • communicate if market participants don’t want a wholesale change to the SFDR,

if market participants feel that these are important.

Morningstar has reported interesting results of a survey it made, finding “that market participants are split on the future of Article 8 and Article 9. Fifty percent of respondents would like to see these classifications replaced by labels, 39% would prefer to keep Article 8 and Article 9 but introduce minimum standards, and 7% voted for the status quo.”

Responses from market participants are particularly important as there are signs that the Commission may be considering more than technical tweaks to the regime to address its concerns about the legal certainty and useability of the SFDR framework and its ability to tackle greenwashing.

Next steps

Responses to the targeted consultation were requested by an online questionnaire and to the public consultation via a dedicated webpage by 15 December 2023. We understand that the Commission intends to adopt a report on the SFDR in Q2 2024.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area. We will be keeping a close eye on this important development so please get in touch if you would like to discuss further. 

This note is intended to be a general guide and covers questions of law and practice.  It does not constitute legal advice.

The article is also available in the Q2 2024 edition of the LPEA - Luxembourg Private Equity & Venture Capital Association’s magazine, Insight/out #29 (page 24 & 25).




Authored by Emily Julier and Rita Hunter.

Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.


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