The Danish FSA: Investment Managers must be better at disclosing sustainability related information
Published 13 May 2024
Category: Impact and ESG
The Danish Financial Supervisory Authority (“Danish FSA”) has in a thematic review assessed several sustainability related issues at two investment managers. The assessment included the investment managers’ integration of sustainability risks and information about the investment product’s sustainability features.
Overall, the Danish FSA concluded that there was room for improvement and issued corrective orders to the investigated investment managers.
Sustainability risks
On basis of the thematic review, the Danish FSA has underlined that sustainability risks must be part of the investment decisions as well as the ongoing risk management. Sustainability risk shall be understood as “an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment”, cf. Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR regulation”) art. 2(22).
The investigated investment managers did, to a certain extent, take sustainability risks into consideration, however, the processes for including the risks were not adequate.
The Danish FSA noted, among other things, that the investment manager must:
- have proper processes and/or management documents to ensure that the manager includes all relevant sustainability risks in accordance with the specific department’s goals, investment strategy and risk limitations.
- have proper processes and/or management documents to monitor sustainability risks and handle increased risks.
- ensure transparent and detailed processes for the investors to understand how sustainability risks are included in investment decision.
In regard to one of the investment managers, the Danish FSA gave an order to elaborate more on the disclosed information on policies on the integration of sustainability risks, cf. SFDR regulation art. 3. This shall ensure more transparency for the investors on the integration on the investment decision-making processes.
Sustainability information about investment products
Information about investment product’s sustainable features shall be communicated in a clear and accurate way to ensure that investors are not being misled or exposed to unnecessary risks. This is due to the fact that such information can constitute a significant part of an investor’s decision.
The investigation showed that the investment managers in general were compliant with the requirements related to sustainability information, but communication about the investment product’s sustainable features were not always presented in an accurate or clear way.
The Danish FSA noted, among other things, that:
- the use of “sustainability” in the name of a specific department of an investment association was misleading, as it gave the impression that the department made sustainable investments or had sustainable features, which was not the case.
- Marketing communications shall give an accurate overall impression of a specific department’s sustainable features in accordance with i.e. a prospectus, cf. SFDR regulation art. 13(1).
In regard to one of the investment managers, the Danish FSA gave an order to disclose clearly on characteristics, cf. SFDR regulation art. 8(1). Further, an order was given to ensure proper processes for having good governance practices in place in each portfolio company as well as ensuring a link between the characteristics and indicators used to measure the achievement of those characteristics.
The European Securities and Markets Authority (ESMA) has led the joint European Supervisory effort which the investigation by the Danish FSA is part of. The full reports by the Danish FSA can be accessed here.