The Danish FSA: Managers need to ensure truly sustainable investments
Published 28 March 2025
Category: Financial Regulation
The Danish Financial Supervisory Authority (the “Danish FSA”) has initiated an inspection of three managers in September 2024. The purpose was to assess their compliance with the requirements for sustainable investments and international standards, focusing on funds with sustainable investment goals (known as Article 9 funds) and those promoting environmental or social characteristics (known as Article 8 funds).
The inspection focused on the managers’ processes, methods and internal reporting to ensure compliance with the sustainable investment requirements in SFDR article 2(17). Further, the inspection focused on compliance with good governance practices, including in relation to Article 8 funds, as well as international standards which the managers claim to take into consideration.
The Danish FSA concluded that managers providing sustainable investment products must enhance their internal processes to ensure their investments align with sustainability requirements. Quoting the Danish FSA (translated from Danish):
“If the issuer of an investment product is committed to investing sustainably, the company must ensure that this is actually the case through strong internal processes. Otherwise, we risk that investors will get a different product than the one they have been promised.”
While the Danish FSA acknowledged that managers have established processes to incorporate sustainability into their investment decisions and management, it highlights significant deficiencies in their processes.
The Danish FSA identified several areas of non-compliance across the managers, including:
- Some managers did not account for all mandatory indicators for measuring negative impacts on sustainability factors (PAI indicators). In several cases, the managers have not set criteria or thresholds or cannot sufficiently document that such indicators were considered.
- Some managers applied more lenient exclusion requirements for companies undergoing a transition towards sustainability, which did not ensure that these investments do not harm environmental objectives today.
- One manager has not adequately addressed or documented the external managers’ methodology for classifying when an activity contributes to an environmental or social objective. They also lacked governance documents for ongoing monitoring and reporting.
- Some managers’ methods for assessing good governance practices were insufficient, as they did not have clear criteria for excluding investments due to breaches of governance practices.
- The criteria and thresholds set by some managers were largely based on invested companies’ intentions to reduce greenhouse gas emissions over the long term, rather than their actual emissions reductions at the time of investment and on an ongoing basis.
- One manager did not have adequate methods to ensure that the greenhouse gas emissions from the underlying investments are reduced in line with the selected reference benchmark. A manager needs to have control procedures in place to ensure that a financial product is managed in accordance with pre-contractual information.
- One manager did not have the necessary processes and methods in place to ensure compliance with international standards in the investment process and in the ongoing reporting with the consequences that non-compliance risk not being discovered.
On that basis, the Danish FSA issued orders to the managers on establishing the necessary methods and processes.
The full reports on inspections by the Danish FSA can be read here (in Danish).
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