At a time of macroeconomic volatility and geopolitical instability the likes of which have not been seen in decades, good governance practices in the funds industry, with a focus on rigorous oversight and investor protection, are a must. Given Luxembourg’s position as the leading fund centre in Europe, ensuring the prevalence of good governance practices is not just a priority for the Luxembourgish and the broader European economy, but for the global asset and wealth management industry as a whole. To this end, the ILA and PwC have once again come together to publish the Luxembourg Fund Governance Survey, now in its 11th edition. Since 2003, the survey has grown to become a recognised tool to better understand governance practices in the Luxembourg fund industry.
With a record number of participants and new sections delving deeper into core issues of concern for fund industry participants, this 11th edition of the Luxembourg Fund Governance Survey is the most comprehensive to date. Our sample of 137 participants – up from 122 in 2020 – represents 48% of Luxembourg-based UCITS assets under management (AuM) and 42% of AIF AuM. The survey provides first-hand knowledge of the inner-workings of boards at Luxembourg-based investment funds and management companies.
Key findings
Increasing prominence of ESG
As investors across the world become increasingly concerned with ESG-related matters and show a desire to invest in funds pursuing ESG principles, boards in the Luxembourg fund industry are paying close attention – particularly given that the Sustainable FInance Disclosure Regulation (SFDR) came into force in March 2021. The majority of boards have agreed on a common definition of ESG and its importance to the fund or the management company, and a growing number have decided on which ESG opportunities and risks are of strategic significance. In addition, an increasing number of boards are reviewing their ESG communications and messaging. Given that the SFDR’s final regulatory technical standards (‘SFDR II’) will be applicable starting January 2023, we expect ESG to continue to figure prominently on boards’ agendas.
Governance practices continue to evolve
The number of non-executive board directors – who tend to be unbiased experts and pillars of good governance – continues its upward trajectory since 2018. As for permanent chairpersons, while the majority of boards have appointed one, there is room for improvement, particularly given that some respondent categories have seen the numbers decline. Virtual meetings, which rose to prominence during the COVID-19 pandemic, continue to be popular among directors. As for codes of conduct, the majority of boards have adopted one and continue to disclose this adoption.
Training, skills and expertise of the board
Board members across all categories of investment funds and management companies continue to have a great diversity of expertise (fund governance, portfolio management, legal, accounting, risk management, compliance etc.), and skills matrices have become much more common. The main topics and issues directors receive training on are AML/KYC, legal and regulatory updates, sustainability/ESG investments, and cybersecurity. Given the coming into force of the SFDR II, and given that the European Parliament has voted in favour of the Digital Operations Resiliency Act (DORA), we expect directors to continue taking up training on the latter two subjects in the coming years. As for the ILA’s Certified Director Program – a program designed to equip directors with the tools of good governance and efficiency – an increasing number of directors are taking it up, a trend we expect to continue in future editions of the survey.
Building strong barriers against money laundering and conflicts of interest
Given the Financial Action Task Force’s visit to Luxembourg in 2022 – the first on-site inspection since 2009 – the survey dedicated a new section to the subject of AML. It is heartening to see that virtually all boards have approved the AML policy of the fund in the last twelve months, and that the vast majority of the ‘Responsable du Respect des Obligations’ approved or validated the suspicious transaction and screening processes. We expect future editions of the survey to continue showing a strong commitment to AML among fund industry stakeholders. In addition, the overwhelming majority of boards maintain a register of conflicts of interest and ask that such potential conflicts be declared at each meeting as a standard agenda item.
