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Deloitte ManCo Webinar WeekFinancial and ESG reporting trends9 December 2020
Public© 2020, Deloitte Audit, SARL 2
Agenda
Financial statements and reporting trends | Sascha Voigt, Director, Deloitte Luxembourg
CSSF circular 02/77 | Anne Ricci, Director, Deloitte Luxembourg
ESG reporting and subscription tax | Dario Zambotti, Director, Deloitte Luxembourg
Wednesday 09 December
Moderator: Nicolas Hennebert, Partner, Deloitte Luxembourg
Public© 2020, Deloitte Audit, SARL 3Public© 2020, Deloitte Audit, SARL 33
PANELISTS
Nicolas Hennebert Audit PartnerDeloitte Luxembourg
MODERATOR
Sascha Voigt
Audit DirectorDeloitte Luxembourg
Anne Ricci
Audit DirectorDeloitte Luxembourg
Dario Zambotti
Audit DirectorDeloitte Luxembourg
Confidential© 2020, Deloitte Audit, SARL 4Public 4
2019 Market StudyBeyond just insights
Sascha Voigt
Audit DirectorDeloitte Luxembourg
2019 Market StudyBeyond just insightsSascha Voigt | Audit Director | 9 December 2020
Public© 2020, Deloitte Audit, SARL 6
Introduction
Market Study exploring financial reporting practices by the 100 largest (by AUM) regulated Funds in Luxembourg based on their 2019 Annual Reports.The Market Study broadly aims to determine what are established:
Accounting and financial reporting practices in Fund Annual Reports?
Corporate governance practices applied and related disclosure of these in Fund Annual Reports?
1
2
Public© 2020, Deloitte Audit, SARL 7
13% FCP
87% SICAV
2
Population Statistics
96% UCITS
11% listed Funds
All use
LuxGAAP
Average pages of annual report:
40580% in English
14% in German
4% in French
new Funds in the top 100 in comparison to 2018 study
Average days until audit report sign-off:
100 days
AuM 3.4 trillion USD
1
Only one self managed fund
4
4% UCIs
3
5
6
7
139
10
8
Public© 2020, Deloitte Audit, SARLARL 8
Accounting Disclosure Trends
Public© 2020, Deloitte Audit, SARL 9Public 9
Financial year-end distribution of 100 largest FundsAccounting Disclosure Trends
• Distribution in line with 2018 study results
• Nearly 50% of 100 largest Funds have December year-ends
• March, June and September also among the preferred year-end months
• Peak of financial statement preparation effort and related audit activities are hence concentrated in the first months of the year
0
10
20
30
40
50
60
-
200
400
600
800
1.000
1.200
1.400
1.600
31-Jan 28-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 31-Aug 30-Sep 31-Oct 30-Nov 31-Dec
Billi
ons
Number of Funds Sum of Average of Combined Assets at Umbrella Level USD
Split of 100 largest Funds by month in which respective year-end falls in 2019 including AuM (in USD)
Public© 2020, Deloitte Audit, SARL 10Public 10
Swing PricingAccounting Disclosure Trends
• Adoption increased by 7% in comparison to the prior year (52%)
• Adoption rate expected to increase with more and more jurisdictions (Germany in February 2020 and Spain in May 2020) allowing the implementation of this anti dilution mechanism
• Swing Pricing gets increased attention from the CSSF: FAQ from July 2019 and March 2020
• Swing pricing was used as a critical liquidity management tool to minimise the negative effects of the COVID-19 crisis
• Alfi Swing Pricing working group reconvened in Q4 2020
Does the Fund apply Swing Pricing?
59%
41% Yes
No
Public© 2020, Deloitte Audit, SARL 11Public 11
Total Expense Ratio disclosuresAccounting Disclosure Trends
• 58% disclose Total Expense Ratios in the Annual Report
• 23% of these Funds have the TERs audited
• Swiss Promoters lead the field given the local requirement for this disclosure for certain funds distributing in Switzerland
Disclosure of Total Expense Ratio
35%
23%42%
Public© 2020, Deloitte Audit, SARLARL 12
Corporate Governance Disclosure Trends
Public© 2020, Deloitte Audit, SARL 13Public 13
Code adoptionCorporate Governance Disclosure Trends
• 65% did not adopt a Corporate Governance Code or this is simply not disclosed in the Annual Report
• Adopters originate primarily from Anglo-Saxon countries where corporate governance practices are more entrenched and formalized
• ALFI Code of Conduct recommends annual confirmation in the Annual Report of adherence to the principles
• Corporate Governance Code related disclosures expected to increase in light of the increased focus on ESG and Sustainability
Has the Fund disclosed whether they have adopted a Corporate Governance Code?
33%
2%
65%
Public© 2020, Deloitte Audit, SARL 14Public 14
Directors` ReportCorporate Governance Disclosure Trends
• Presentation of separate Director`s Report increased in comparison to the prior year (56%)
• In line with current trend and expected to increase in light of the increased focus on ESG and Sustainability
• This is a key communication channel through which Boards can demonstrate and showcase to investors that they have applied good corporate governance practices during the year under review
• ALFI provides a template of a Board report for Funds to follow
Is a separate Directors` Report presented?
Yes
No
67%
33%
Public© 2020, Deloitte Audit, SARL 15Public 15
Directors` fees disclosuresCorporate Governance Disclosure Trends
• 32% disclose fees paid to Directors in the Annual Report. This is primarily the fees paid to Independent Directors as the Executive Directors are compensated as part of their employment by the manager
• This is separate to the remuneration disclosure of identified staff
• As Directors are appointed by the Shareholders at the AGM it is considered good corporate governance to give transparency to the fees paid to Directors
• Average Directors` fees: USD 177k
• Average fee per Director: USD 53k
Directors fees disclosure
32%
68%
Public© 2020, Deloitte Audit, SARL 16
Benchmark your Funds against the Top 100Top 100 Luxembourg Funds’ Market Study
• Swing Pricing: Y/N
• TER disclosed: Y/N
• Director’s fees disclosed: Y/N
• Delegate remuneration: Y/N
• Directors report: Y/N
• ALFI code adopted: Y/N
• Sub-committees: Y/N
• Size of Board: #
• Independent Directors : Y/N
• Female Directors: Y/N
Many thanks for your attention.The full 2019 Market Study is available upon request.
Confidential© 2020, Deloitte Audit, SARL 17Public 17
CSSF FAQ on CSSF Circular 02/77Impact for Management Companies
Anne Ricci
Audit DirectorDeloitte Luxembourg
Public© 2020, Deloitte Audit, SARL 18
Agenda
Introduction Overview – The FAQ in a nutshell
Impact for the management companies
The team
Public© 2020, Deloitte Audit, SARL 19
IntroductionCSSF FAQ on Circular CSSF 02/77
1.3381.551 1.738 1.791 1.852 1.735
2014 2015 2016 2017 2018 2019
Number of notifications
226343 329
251 245 238
2014 2015 2016 2017 2018 2019
Number of NAV calculation errors
1.112 1.2081.409 1.540 1.607 1.497
2014 2015 2016 2017 2018 2019
Number of Compliance Breaches
Source : CSSF activity reports 2014 to 2019
Public© 2020, Deloitte Audit, SARL 20
Overview - The FAQ in a nutshellCSSF FAQ on Circular CSSF 02/77
Selection of the correction methods in case of active investment breaches
Interpretation of queries relating to the general application of the Circular- Article 43(1) of 2010 Law- Cash management
Application and reporting for different vehicles (including SIFs)
Tolerance Thresholds
Public© 2020, Deloitte Audit, SARL 21
Impact for the management companiesCSSF FAQ on Circular CSSF 02/77
Central repository of responses to common queries relating to the Circular
Strengthen the control environment
Organizational requirements and formalized documentation
Focus of CSSF
Confidential© 2020, Deloitte Audit, SARL 22Public 22
Sustainable financeDario Zambotti
Audit DirectorDeloitte Luxembourg
Public© 2020, Deloitte Audit, SARL 23
Agenda
01 02 03
The European Framework
EU Regulatory wave
Luxembourg
Public© 2020, Deloitte Audit, SARL 24
From the EU Green Deal to the Action Plan - Striving to be the first climate-neutral continentSustainable Finance: the European framework
The European Green Deal provides a roadmap with actions to boost the efficient use of resources by moving to a clean, circular economy and stop climate change, revert biodiversity loss and cut pollution. It outlines investments needed and financing tools available, and explains how to ensure a fair and inclusive transition.
The Action Plan on sustainable finance adopted by the European Commission in March 2018 has 3 main objectives and define 10 actions:
1. Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth;
2. Manage financial risks stemming from climate change, environmental degradation and social issues; and
3. Foster transparency and long-termism in financial and economic activity.
Public© 2020, Deloitte Audit, SARL 25
The main pillarsSustainable Finance: EU regulatory wave
Low carbon benchmarks Regulation (CBR)A regulatory framework which lays down minimum requirements for EU Climate Transition Benchmarks
and EU Paris-aligned Benchmarks at Union level. These labels can only be applied by compliant
administrators who will have disclosure obligations (such as on the methodology applied).
Disclosure Regulation (SDR)Financial market participants and financial advisers
are required to disclose specific information regarding their approaches to the integration of
sustainability risks and the consideration of adverse sustainability impacts.
Taxonomy Regulation (TR)The Taxonomy Regulation provides for a general framework for the development of an EU-wide
classification system for environmentally sustainable economic activities. It creates a framework that sets
out the criteria to be considered for a product or activity to be considered environmentally
sustainable.
2020
30 April 2020: Low carbon benchmarks regulation: ESG benchmark statement disclosure
2021
2022
2023
31 December 2022: Taxonomy Regulation for second set of financial products disclosure requirements (other environmentally sustainable activities: water, circular economy, pollution and biodiversity)
31 December 2021: Taxonomy Regulation for first set of financial products disclosure requirements (environmentally sustainable activities contributing to climate change mitigation or adaptation)
10 March 2021: Disclosure regulation for most provisions
1 January 2022: Disclosure regulation for annual report disclosures
31 December 2022: Disclosure regulation for adverse sustainability impacts on product level
Public© 2020, Deloitte Audit, SARL 26
Financial market participants
• Credit institutions providing portfolio management
• Alternative investment fund managers (AIFM)• Management company of UCITS• Investment firms providing portfolio
management• Managers of qualifying venture capital funds• Managers of qualifying social
entrepreneurship funds
• Insurance undertakings
• Institutions for occupational retirement provision (IORP)
• Manufacturers of pension products• Pan-European personal pension product
(PEPP) providers
Financial advisers
• Credit institutions providing investment advice
• AIFM providing investment advice• UCITS management companies providing
investment advice
• Insurance intermediaries providing insurance advice with regard to IBIPs
• Insurance undertakings providing insurance advice with regard to IBIPs
• N/A
Financial products
• Portfolio management (as per MiFID II)
• UCITS• Portfolio management (as per MiFID II)• Alternative investment fund (AIF)
• Insurance-based investment product (IBIP)
• Pension product• Pension scheme• PEPP
Banking
Investment management
Insurance
Pensions
Disclosure & Taxonomy Regulation: a broad scopeSustainable Finance: EU regulatory wave
Public© 2020, Deloitte Audit, SARL 27
31 December 2022: Disclosure regulation for adverse sustainability impacts at product level
1 January 2022: Disclosure regulation for annual report disclosures
10 March 2021: Disclosure regulation for most provisions
Requirements to disclose information:• At Financial Market Participants / Financial Advisors level
• On the website• On pre-contractual disclosures• On the periodic report (annual accounts for AIFM and ManCo)
• At Financial Products level• On the website• On pre-contractual disclosures• On the periodic report (annual accounts for AIF and UCITS)
Integration of sustainability risks in the investment decision-making process (web-site)
Principal adverse impact of investment decisions on sustainability factors are considered? (web-site)
Include in the remuneration policies information on how those policies are consistent with the integration of sustainability risks. (web-site)
Include in the pre-contractual disclosures:a. How the sustainability risks are integrated in the investment decision; if sustainability risks are
deemed not relevant, disclose a clear and concise explanation of the reasons why.b. The likely impacts of sustainability risks on the returns the financial products
• How will you identify and measure sustainability risks and adverse sustainability impacts?• Will you adjust your current product range and/or adjust the investment policy of existing
products?• To which extent will the entity level disclosures be aligned on group level?
• Have you considered how to gather information on companies which are not in scope of the Regulation?
• What is your view on the set deadlines (i.e. misalignment between deadlines for financial market participants and for corporates)?
Disclosure Regulation: a broad scopeSustainable Finance: EU regulatory wave
Applicable from 10 March 2021
Public© 2020, Deloitte Audit, SARL 28
Taxonomy RegulationSustainable Finance: EU regulatory wave
Taxonomy
Substantial contribution to at least one environmental objective: 1. Climate change mitigation 2. Climate change adaptation 3. Sustainable use and protection of water and marine resources 4. Transition to a circular economy 5. Pollution prevention and control 6. Protection and restoration of biodiversity and ecosystems
Compliance with minimum social and governance safeguards
Compliance with technical screening criteria that have been established by the Commission
“No significant harm” is caused to any of the other environmental objectives (DNSH)
How an activity qualify as environmentally sustainable?Four conditions for an activity to qualify
• How will you gather the necessary data on your investments?• Will you use specific tooling to calculate the Taxonomy alignment of your managed
portfolios?
What is the Taxonomy?A list of economic activities that are considered environmentally sustainable for investment purposes.
Why a Taxonomy?To provide clarity and transparency on environmental sustainability to investors, financial institutions, companies and issuers thereby enabling informed decision-making in order to foster investments in environmentally sustainable activities.
What is it not?It is not a mandatory list to invest in, nor a standard, nor an exclusion list. It does not harmonize the existing market practices and strategies with regards to sustainable finance.
Applicable to • Financial market participants offering financial products in the
EU, including pension providers• Large public-interest companies with more than 500 employees
including banks, insurance companies and listed companies who already require to provide a non-financial statement
• EU and member states when setting public measures, standards or labels for green financial products or green (corporate) bonds
Public© 2020, Deloitte Audit, SARL 29
Luxembourg is positioning as leader in sustainable finance Leader for green bonds; LFF annual event on sustainable finance; Luxembourg sustainable finance roadmap; numerous initiatives
Local action - Fiscal Law 2021 Proposed amendment to UCI Law in relation to subscription tax: increasing the sustainable assets in portfolio decrease the subscription tax applied
Deloitte is discussing the Fiscal Law application within different working groupsDifferent questions have been raised by the market and we are actively involved in the discussions
Deloitte can help in different ways along the Fund value chainFrom trainings and workshops on the EU action plan and Regulations to support on the strategy design and implementation
Get ready, comply, lead the futureThe Green Deal is an ambitious plan to transform the EU’s economy for a sustainable future, it not only a compliance matter
Local action on Disclosure regulation – CSSF fast track for prospectus updateThe CSSF declared that a fast track will be implemented and that Fund boards will also have to self-certify that their funds are meeting the requirements of SFDR alongside any fast-track applications.It also underlined that asset managers should “limit their changes to the prospectus in particular”.
Luxembourg leading positionSustainable Finance: local zoom
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Public© 2020, Deloitte Audit, SARL
Nicolas Hennebert Audit Partner+352 45145 [email protected]
Sascha VoigtAudit Director+352 45145 [email protected]
Anne RicciAudit Director+352 45145 [email protected]
Dario ZambottiAudit Director+352 45145 [email protected]