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Since 2015, following the adoption of the UN Agenda (2030) for Sustainable Development and its 17 Sustainable Development Goals (SDGs), the Paris Agreement on Climate Change, where concrete climate targets have been set and where it has become clear that financial flows should be redirected towards sustainable projects to achieve these climate goals, or the European Commission’s action plan: Financing Sustainable Growth in 2018,the enthusiasm for sustainable finance has continued to grow and is expressed in numerous statements, initiatives, political and private, international, European and national.
But what exactly is sustainable finance? According to the European Commission’s Action Plan: Financing Sustainable Growth (2018) ‘Sustainable finance’ generally refers to “the process of taking due account of environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities. More specifically, environmental considerations refer to climate change mitigation and adaptation, as well as the environment more broadly and related risks (e.g. natural disasters). Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities. Environmental and social considerations are often intertwined, especially as climate change can exacerbate existing systems of inequality. The governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.”
On the basis of these considerations and in order to effectively contribute to address climate risks, sustainability should become a necessity to inscribe into the core values to the financial sector. The importance of this topic has notably been expressed by the roadmap elaborated by the Luxembourg Government and drafted in partnership with UNEP, which illustrates a detailed plan for an extensive sustainable finance strategy for Luxembourg as an international financial centre, in order to actively contribute to the Agenda 2030 and the objectives of the Paris Agreement.
The CSSF will use all the means at its disposal as the supervisory authority of the financial sector to contribute to the achievement of these objectives within the framework of its own missions that notably consist in ensuring the safety and soundness of the financial sector, in the public interest. The CSSF will also carefully consider the inclusion, in its risk-based approach supervision, of risks arising from sustainability considerations for the financial sector.
It is notably incumbent upon the CSSF to make sure that supervised entities are preparing for new regulations notably resulting from the European Commission’s Action plan : Financing Sustainable Growth (2018), but also that they, while awaiting new European regulations, and given their central role in reshaping our economy, not only prepare for the impact of the new regulations, but make sustainable development part of their internal organisation, activities and corporate strategy and values and take adequately into account sustainability risks.
Supervised entities should therefore integrate Environmental, Social and Governance (ESG) factors into their strategy and their risk management. Market participants must include ESG factors into the assessment of investment decisions, as there is a undeniable need of financial market participants to have clear, open and transparent information on sustainability.
In order to coordinate the numerous active implications of the CSSF in national, European and international working groups and to engage in communication, exchange and collaboration, the CSSF has set up an internal group on sustainable finance which is composed of experts in sustainable finance matters of different departments and has a proactive approach to this topic.
As the supervisory authority of the financial sector, the CSSF strives to accompany the transition of the financial sector and its players in a proactive way.
The integration of sustainability and adequate consideration of sustainability risks as key drivers of financial strategies is a long-term objective. In support of this ambition, the CSSF’s supervisory priorities in the area of sustainable finance aim at fostering a cohesive implementation of the sustainable finance framework across the financial sector and ensuring the integration of ESG requirements in the CSSF’s supervisory practice.
These priorities have been published in a document which aims at drawing the attention of the financial sector to a number of prominent matters to be addressed in this area. If deemed necessary, our supervision priorities may be adjusted, and the CSSF’s duties of ongoing prudential supervision may also warrant other ESG-related aspects to come under scrutiny.
The CSSF actively collaborates in the work of numerous European institutions and working streams on the topic of sustainable finance.
ESMA, the EU’s securities markets regulator, has published its Strategy on Sustainable Finance. The strategy sets out how ESMA will place sustainability at the core of its activities by embedding Environmental, Social, and Governance (ESG) factors in its work.
EBA has also prepared an Action Plan on sustainable finance and identified its key priorities. These include considerations on how ESG can be incorporated into the regulatory and supervisory framework of EU credit institutions. EBA also has an important role in monitoring market practices related to sustainability, and engaging with relevant stakeholders and the industry.
The different initiatives of the Commission’s action plan, as well as the upcoming renewed sustainable finance strategy announced by the European Green Deal are followed closely by the CSSF in order to assess the impacts for the financial sector and the necessary adaptations from a supervisory point of view. Currently, a public consultation is taking place with the aim of collecting the views and opinions of interested parties in order to inform the Commission’s renewed strategy on sustainable finance.
As the CSSF carries out its missions in line with the international standards, and ensures an independent, forward-looking and risk-based supervision, it has become an official member of the Network of greening the financial system (NGFS) in 2019.
The Network’s purpose is to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilise capital for green and low-carbon investments in the broader context of environmentally sustainable development.
To this end, the Network defines and promotes best practices to be implemented within and outside of the Membership of the NGFS and conducts or commissions analytical work on green finance.
One of the first official documents published in 2019 by this group is the comprehensive report of the NGFS called “a call for action” that recommends supervisory authorities to include climate related risks in the supervision of financial institutions.
As a securities regulator, the CSSF is also an active member of IOSCO, the International Organization of Securities Commissions. Considering that sustainability issues in general are raising important challenges to meet the core objectives of securities regulators, IOSCO published several documents, as for example the 2019 IOSCO Statement on Disclosure of ESG Matters by Issuers (published in January 2019) and the recent report on Sustainable Finance and the Role of Securities Regulators and IOSCO (published in April 2020).
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