Thematic review of pension funds subject to SFDR article 8
Published 31 July 2024
Category: Impact and ESG
The Danish Financial Supervisory Authority (the “DFSA”) initiated an inspection of three pension funds’ disclosing pursuant to SFDR article 8 in November 2023. The inspection was part of an investigation on the compliance with sustainable investment requirements and international standards for pension funds offering sustainability optioned products. The results from the inspection have now been published.
The inspection focused on the pension funds’ methods and processes, including internal reporting to ensure compliance with sustainable investment requirements, and their compliance with international standards as informed in the “Statement on principal adverse impacts of investment decisions on sustainability factors”, cf. SFDR level 2 article 4.
The DFSA concluded that each pension fund within several areas has processes and methods in place to ensure compliance with the legal requirements. However, they also concluded that, in some areas, these processes and methods are not sufficient or sufficiently documented. Across the three pension funds, the following issues were highlighted:
Sustainable investments:
For some of the funds it was unclear how and to what extent the sustainable investments of the funds’ products contributed to environmental or social objectives. Further, there were a lack of documentation for how the contribution to the individual objectives was assessed and continuously monitored.
The DFSA also found that some of the pension funds only took some parameters into consideration when performing the “do no significant harm”-assessment but not the mandatory indicators. Further, there were not any clear criteria or threshold values to determine when a negative impact is significant – and thus the investment not sustainable.
Therefore, some of the funds have been required to have processes and methods in place across asset classes to ensure compliance with the sustainable investment requirements as well as ensuring assessment and reporting of the contribution to each environmental and social objective for the sustainable investments. This to help clarify the specific and ongoing contribution to the various objectives.
Good governance practices for non-sustainable investments:
The DFSA found that some of the funds did not have sufficient processes in place to ensure that good governance practices are followed in the companies in which investments are made. The DFSA underlined that active ownership itself is not enough and that it is necessary to have criteria and governance documents regulating when a company can no longer be invested in due to breach of good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.
The DFSA required that some of the funds should have sufficient processes in place to ensure that investee companies follow good governance practices in relation to the products disclosing pursuant to SFDR article 8.
International standards:
As for one of the pension funds, the DFSA found that the fund did not have sufficient internal methods and processes to ensure compliance with international standards, including in particularly the alignment with the goals of the Paris Agreement. Further, there was no ongoing reporting on compliance with the international standards to the management of the fund.
On that basis, the DFSA issued an order to the fund on establishing the necessary internal processes and methods to ensure the necessary reporting and compliance.
The reports on the thematic inspections can be accessed here in regards to PFA Pension, Forsikringsaktieselskab, Danica Pension, Livsforsikringsaktieselskab and AP Pension Livforsikringsaktieselskab.
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