Thematic review of sustainability disclosures for funds with sustainable investment as the objective

On 3 February 2023, the Danish Financial Supervisory Authority (“DFSA”) published a thematic review of sustainability disclosures for eight funds with sustainable investments as their objective. The review was focused on disclosures in key investor information documents (“KIID”) and prospectuses. Among others, the purpose was to investigate whether sustainability information was given in a comprehensive, clear, and adequate way as well as whether investors were given the required information.

The review investigated compliance with disclosure requirements following directly from the SFDR, Taxonomy and KIID Regulation. However, the DFSA has not reviewed the disclosures and templates required pursuant to the level 2 SFDR disclosure requirements applicable from 1 January 2023. Further, the review did not cover internal processes by the Alternative Investment Fund Managers (“AIFM”).

Overall, the DFSA found that the investigated AIFMs had not properly ensured that the disclosed sustainability information was sufficient. The disclosures were too generic on the sustainability issues. The DFSA underlined that for funds with sustainable investment as the objective it is especially important with adequate and comprehensive sustainability information since this information is essential for investors’ decisions.

The following observations made by the DFSA across the eight AIFMs and funds can be highlighted:

• Information on the sustainable investment objective has been inconsistent and unclear. As an example, in one of the funds DFSA found it difficult to assess whether the objective was solely reduction of carbon emissions or also a contribution to a circular and more resource-efficient economy. DFSA concluded that it is not problematic to have more than one objective, however, it must be clear what the fund’s actual objectives are.
• Information in the prospectuses on how the sustainable investment objectives of the funds are going to be attained and how the contribution to the objectives is measured have been insufficient or incomplete. In one of the investigated AIFMs, the fund had the objective of, among others, investing in accordance with the Paris Agreement and contributing to the achievement of the UN’s 17 Sustainable Development Goals (“SDGs”). However, since the prospectus did not include information on, among others, how it was ensured that the fund’s investments contributed to all 17 SDGs, DFSA found the information insufficient. DFSA hereby underlined that this information is central in context of the SFDR as investors need to be able to assess how their investments are impacted by the funds’ sustainable objectives. Further, this information is important for investors in order to be able to assess whether a trustworthy plan for the attainment and measurement of the investment objective has been made.
• When a fund commits to invest in environmentally sustainable economic activities in accordance with the Taxonomy Regulation, information on how the investments will meet the requirements for those economic activities have been either insufficient or not included. Among others, AIFMs need to ensure that for each fund it is informed how requirements for environmentally sustainable economic activities as well as the threshold values are complied with. Also, the prospectuses have been unclear and not consistent when it comes to information on the funds’ sustainable investment objectives. Further, it was underlined in the review of one of the AIFM, that the proportion of a funds’ underlying investments in economic activities that qualify as environmentally sustainable must be informed in percentage. Also, the prospectus must include information on the percentage proportion of investments in enabling and transitional activities.
• For several funds, the prospectuses did not include sufficient information on how it was ensured that the investments did not significantly harm environmental or social objectives as well as whether the underlying investments were made only in companies following good governance practices. They are both requirements for an investment to be sustainable. Specifically for the information on the do no significant harm-assessment, DFSA has attributed the deficiencies to the fact that AIFMs did not provide sufficient information on their criteria and processes for the assessment.
• KIIDs in several of the funds did not describe the sustainable investment objectives which the funds’ investments shall contribute to. Also, for some funds the DFSA found discrepancy between the KIID and the prospectus when it came to information on the objectives.
• Information on the impact of sustainability risks on the return of the fund as well as information on how sustainability risks are integrated into the investment decisions have not been addressed correct by several funds. They have described positive impacts of sustainability risks and included information on the funds’ own work regarding sustainability and the impact on the fund’s return. Both approaches are not in accordance with the actual definition of sustainability risks in SFDR art. 2(22). Also, DFSA underlined the importance of information on whether these risks have a low, medium, or high likely impact on the return of the fund. Further, DFSA has for one AIFM highlighted that the prospectus did not include information on the specific sustainability factors which form basis of the assessment on the impact of sustainability risks on the return of the fund. DFSA underlined the importance of these information as investors shall be able to understand the fund’s exposure to sustainability risks.
• Where an index has been used as a reference benchmark, information on how the index is adapted to the objective as well as how and why the index differs from a broad market index, has in some cases been left out of the prospectus. It is not enough only to state in the prospectus that an index has been used, which was the case for one of the investigated AIFMs.

DFSA has issued orders to each investigated AIFM based on of the above observations showing violation of disclosure requirements as well as material issues.

The press release and the individual statements can be found here.

Next steps: Later this year, the DFSA will follow their review up by publishing a memorandum in which they describe and elaborate on what they have identified as good practices within the area.

Tags:  ComplianceDisclosure RequirementsSustainability