Regulatory Pressure Mounts on SFDR Disclosures

    Stockholm (NordSIP) – At the end of the first week of October, the Swedish Financial Services Authority (FSA), Finansinspektionen (FI), published a note describing a recent survey of Swedish funds’ classification according to the EU’s Sustainable Finance Disclosures Regulation (SFDR). The survey found that a majority of funds (73.9%) are self-reported as Article 8 under the EU regulation. Although FI noted some apparent inconsistencies in 19 funds, supervisors in Finland and Denmark appear to have taken a lead in reviewing disclosures more closely.

    Majority of Funds are Article 8

    According to the survey, for 43 funds (5.5%), the fund managers consider sustainability risks to be irrelevant, while for 150 funds (19.1%), fund managers consider sustainability risks to be relevant, as per Article 6 of SFDR. Article 8 fund products must promote environmental and/or social characteristics, provided that the companies in which the investments are made follow good governance practices, according to SFDR. The survey shows that 580 funds (73.9%) self-describe as promoting environmental and/or social characteristics. The survey shows that only 12 funds (1.5 %) have sustainable investment as their goal, thus falling under the remit of Article 9 SFDR.

    “The survey results are based on information provided by the fund managers on how they categorised the funds, not if the funds are compliant (or not) with the respective fund categorisation,” Victoria Ericsson, Deputy Communications Director at FI told NordSIP when asked about the prevalence of Article 8 funds.

    “Internationally, the Swedish fund market has a relatively high proportion of Article 8 funds compared to the fund market in other countries. In Sweden, we have had a national legislation on sustainability disclosures for fund managers since 2018. Thus, many fund managers have worked with sustainability issues a while and are integrating sustainability investing strategies into the funds,” Ericsson continued.

    Although NordSIP was unable to obtain specific figures from other FSA, the general outlines of funds’ SFDR classification is not a Swedish exception. “We have not yet gathered information about how many funds are disclosing information according to SFDR article 6, 8 or 9. However, we are able to comment on a general level that, we have observed only a few funds that disclose information according to article 9. Most funds are either disclosing information according to article 6 or 8,” Anna Mäkipeska, Market Supervisor at Finanssivalvonta, Finland’s FSA, told us.

    Sustainable Funds Inconsistencies

    FI’s survey of the state of play in Sweden also showed that 381 of the funds (48.5%) are marketed as sustainable. However, 18 of theses funds are categorized as neither Article 8 nor Article 9 products.

    FI also noted that one fund which includes ‘ESG’ in its name is categorized as neither Article 8 nor Article 9 product. The managers of these funds have been informed of FI’s observations and emphasised that marketing materials must reflect the fund’s investment strategy.

    FI Not Yet Reviewing Disclosures

    In its report, FI urged all fund managers to read the European Commission’s clarification of SFDR, noting that one of the main goals of SFDR is to reduce the risk of greenwashing. Nevertheless, Ericsson added, the European Commission states that Article 8 products are a broad category of financial products including various investing strategies, citing that “Article 8 of Regulation (EU) 2019/2088 remains neutral in terms of design of financial products. It does not prescribe certain elements such as the composition of investments or minimum investment thresholds, the eligible investment targets, and neither does it determine eligible investing styles, investment tools, strategies or methodologies to be employed.”

    The Swedish FSA does not, however, appear to be reviewing fund disclosures just yet. “FI has not looked into the SFDR disclosures for individual funds or any other fund documents as this was not in scope in this activity. A possible second step might be to look deeper into some funds’ disclosures,” Ericsson adds.

    “The aim of the published activity was to get a better understanding on how the Swedish fund managers have implemented the SFDR. Therefore, the questionnaire was sent out to all managers of Swedish UCITS or special funds. This activity was the initial review of implementations of SFDR requirements by managers of Swedish funds. FI are planning to conduct further reviews in relation to SFDR and funds’ disclosures. However, this is in the planning phase, and being discussed internally and FI has not communicated any next steps,” Ericsson says.

    Sweden Focuses on Stakeholder Dialogue

    The Swedish FSA’s report noted that FI is in dialogue with other countries’ supervisory authorities to ensure uniform interpretation and implementation of the new EU rules as well as the industry about the challenges they face in implementing SFDR. “Finansinspektionen has a sustainability forum for people working with supervision focusing on sustainability related work tasks in order for them to discuss ongoing work, share knowledge and exchange views on challenges etc. We have also set up a sustainability forum for legal counsellors focusing on legal matters in relation to sustainability related issues,” Ericsson explains.

    “SFDR was implemented in March this year and we are still in an early stage focusing on the implementation of the new regulation. Finansinspektionen works together with other EU member states in order to ensure implementation and interpretation of the new rules throughout the European Union. We are having an ongoing dialogue with industry associations in order to understand the key challenges for the financial companies. We are also active in the development of the Regulatory Technical Standards for SFDR and the Taxonomy regulation,” Ericsson continued.

    “We have an integrated operational approach and co-workers working with sustainability matters are located within the supervisory units (or the legal units) as any other co-worker. We are treating sustainability risks as any other risk and are focusing on integrating sustainability into the regular supervision. However, Finansinspektionen has communicated a couple of top priorities and sustainability is one of them,” Ericsson concludes.

    Finland’s Finanssivalvonta Reviews Ahead

    The process seems to have moved a bit further in Finland. “We are currently reviewing the SFDR disclosures when we approve a fund’s rules and review other relevant fund documentation. For funds’ that are disclosing information according to article 8 or 9, we require that these funds disclose a short description of this information also in the investment strategy in the fund rules,” Finanssivalvonta’s Mäkipeska explains.

    “We have published ‘Q&A’-information regarding SFDR-disclosures for investment funds on Finanassivalvonta’s homepage (only in Finnish and Swedish). Here, we have also published our interpretation that only article 8 and 9 funds may use words as ESG and sustainable in the fund’s name,” Mäkipeska adds.

    Finanssivalvonta’s review process appears to be well organised and with clearly delineated areas of responsibility. “Currently the whole investment fund team (approximately 8 persons with also other responsibilities on the supervision of UCITS and AIFMD activities) is involved in reviewing SFDR-disclosures regarding disclosures of article 6. Disclosures of Article 8 and 9 are currently reviewed by a couple of dedicated persons. However, in the future, this will also be the responsibility of the whole investment fund team. Technological solutions for gathering information about SFDR classifications is also relevant in the future,” Mäkipeska says.

    “At this point, we have reviewed the SFDR pre-contractual disclosures of article 6, 8 and 9 and based on this material we have not observed concerns of greenwashing,” Mäkipeska concludes.

    The View from Denmark

    Denmark has taken the lead on this matter from the get go. When NordSIP reached out to the Danish FSA in March, Finanstilsynet had already established a dedicated unit focusing exclusively on sustainable finance, according to Theodor Christensen, Deputy Director Capital Market Regulations at Denmark’s Finanstilsynet and head of the new Unit for Sustainable Finance.

    Although NordSIP was unable to get similar figures or confirmation for Denmark, the Danish regulator appears to be busy. According to recent media reports, Danish managers’ Article 9 funds appear to have invested in gas, mining and tech companies but not so much in companies that promote the green transition.

    “We have noticed that many article 9 funds are indeed quite heavy on tech and other stocks that some investors might not expect to find there. I am not saying that this cannot be within the scope of Article 9, but it is noteworthy, and financial market participants would need to make sure that the underlying assets in a given Article 9 product are consistent with the manner in which they promote that product,” Christensen commented on this occasion.

    Fighting Greenwashing

    Although supervisory efforts are not synchronised, it is encouraging to see that regulators are engaging with the market to ensure SFDR does not become a greenwashing tool.

    As the IMF noted in its recent Global Financial Stability report, one of the main tasks of regulatory oversight is to prevent greenwashing to facilitate the flow of funds into sustainable investments necessary to guarantee the planet’s future.


    Image courtesy of Photo Mix 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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