Early Nordic Experiences with SFDR

    Stockholm (NordSIP) – Following almost three years of preparation, the EU Sustainable Finance Disclosures Regulation (SFDR) (EU Regulation 2019/2088) finally came into effect this week. The regulation was proposed in May 2018 and was formally adopted by the European Parliament and the Council in the spring of 2019. It seeks to increase transparency about the integration of sustainability risks in the financial sector by requiring financial advisers and financial service providers to disclose both the intended positive sustainability effects as well as negative externalities.

    In practice, the new disclosure requirements mean that fund managers have to disclose whether their funds fall into the remit of articles 6, 8 and 9 of SFRD. Although it seems that the industry is still adjusting to the measures, Handelsbanken and Storebrand SPP provide some good examples of what the implementation of the regulations will look like at this early stage.

    The New SFDR Classification

    According to the regulation, Article 6 covers the transparency requirements of funds that “integrate sustainability risks”. These are what Handelsbanken Asset Management (AM) classifies as “White” funds, where “sustainability risks are managed through its investments but does not have sustainable investments as its objective.” According to Nordea, all funds not covered by article 9 and 8 are covered under Article 6, “including some funds with baseline ESG safeguards and integration of sustainability risk in the investment process such as NAM’s overall coal exclusion.”

    Article 8 covers the disclosures of funds that “promote environmental and social characteristics”. These funds are classified as “Light Green” in Handelsbanken AM’s system. Such funds take into consideration “the environment and climate, as well as human rights, employees’ rights and equal opportunities”. Nordea adopts a similar ‘shades of green’ approach, and describes these funds as having “enhanced ESG characteristics” these are From Storebrand SPP’s perspective, these are funds with sustainability requirements, such as avoiding fossil fuels, but the entire investment does not focus on sustainability.

    Article 9 covers the disclosures of funds that conduct “sustainable investments”. For Handelsbanken AM, these funds are considered “Dark Green” and invest in companies “with products and services that are deemed to directly contribute positively to the fulfilment of one or several of the targets in Agenda 2030.” For Nordea, these “Dark Green” funds “evenly balance the goals of a sustainable world and financial returns”. According to Storebrand SPP, such funds can invest in companies that produce renewable energy or have services that contribute to increased gender equality.

    Implementing SFDR

    “The demands for transparency in the sector are now increasing, and we see continued opportunities for the Bank to profile itself with our sustainable and competitive product offering, which we work tirelessly to develop,” says Catharina Belfrage Sahlstrand, Head of Sustainability and Climate action at Handelsbanken. “ According to Handelsbanken, customers will start receiving information prior to purchasing advisory services, mutual funds or insurance, including disclosures on exclusions. Of the 30 funds listed by Storebrand SPP, 28 are listed as falling under the remit of Article 8, while only 2 are covered under Article 9.

    Most of Nordea’s funds will now be aligned with the stricter fossil-related restrictions – 213 to be precise. 209 of Nordea’s funds can be classified as “light green” category. Another 4 funds are “dark green” category. Although €120 billionhas been invested in these green funds, the remaining 155 fall under Article 6. However, Nordea also sets requirements for the remaining 155 funds. ”The customer demand for sustainable investment products is higher than ever, and is the way forward. And for the remaining funds which are not marketed as having enhanced ESG characteristics, we still have fundamental requirements in place. We screen these funds for violation of human rights, we exclude coal producers and we examine the companies’ environmental impact and social factors and, if necessary, exclude them,” says Eric Pedersen, Head of Responsible Investments at Nordea Asset Management (NAM). “In addition, we will on an ongoing basis be analysing our Article 6 funds, to see which ones are candidates to move to Article 8.”

    Storebrand SPP does not include article 6 in its classification. However, this is not an oversight. “Since all our funds are fossil-free and promote sustainability, they are categorized as article 8. The SPP Green bond fund and SPP Global Solutions fund have sustainability as an objective, so they are categorized as article 9,” Sara Skärvad, Director of Communications at Storebrand Asset Management, told NordSIP.

    The Road Ahead

    Although the SFDR came into force on March 10th, not all parts of the regulation were ready to be implemented on time. The document foresaw that draft regulatory technical standards (RTS) should be developed in consultation with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) (collectively known as the “ESAs”). However, the schedule was a bit to close for comfort.

    As noted by State Street, “the Commission has publicly agreed to defer the ‘level 2’ regulatory technical standards (RTS) until a ‘later date’, which the authors speculate could be 1 January 2022 in line with the application of the EU Taxonomy Regulation. This means that market participants can provide ‘high-level’ and ‘principles-based’ disclosures by 10 March where requirements are expected to be further specified in level 2.”

    The process seems on track to meet the new deadline following the publication of the ESAs’ Final Report on draft Regulatory Technical Standards in February.

    Image by StockSnap from Pixabay

    Image by Jai79 from Pixabay

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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