Even in Denmark, recently ranked the world’s greenest country, asset managers are trying to figure out how to adapt to new and evolving requirements for climate-friendly portfolios.
Danske Bank A/S, Denmark’s biggest financial group, says it’s starting out with a “conservative” interpretation of new rules being developed in the European Union that are intended to steer capital away from the worst greenhouse gas emitters.
Thomas Otbo, Danske’s chief investment officer at its $130 billion asset management unit, says there are still “a lot of uncertainties” in how to adapt to the new regulatory framework. He says that’s why just 42% of the assets that Danske controls are in green-labeled funds. He’s now looking into getting Danske’s index funds to track new EU climate benchmarks to raise that ratio.
“Throughout the rest of the year we will be upgrading our product offering,” Otbo said. “We need to bring our passive products into play on the sustainability agenda. That’s a big focus for us at the moment.”
Financial advisers everywhere are trying to understand how one of the biggest overhauls of global regulations in history will affect the way they run their operations. Europe’s new Sustainable Finance Disclosure Regulation (SFDR) requires the industry to label how green an investment product is, so that end investors know what they’re buying. Managers need to demonstrate when it’s relevant to use an environmental, social or governance (ESG) label and factor in risks, and when it isn’t.
Defining an investment product as green isn’t enough. Managers need to go a step further and tell investors whether it’s light or dark green, also known as Article 8 and Article 9. The former promotes broad ESG characteristics, while the latter sets specific targets that must be met.
But the requirements have yet to be finalized, leaving plenty of room for questions as managers try to anticipate what the final rulebook will look like. That’s got even national regulators struggling. Sweden’s Financial Supervisory Authority says it’s working closely with the financial industry and supervisors in other countries to interpret the requirement and avoid inconsistent labeling.
“To classify and distinguish between Article 8 and 9 products is challenging, as the SFDR lacks clear definitions for the two different categories,” FSA spokesman Peter Svensson said.
Denmark’s regulator has warned against exploiting the situation after a number of informal inspections found some companies had resorted to loose definitions of what constitutes a sustainable asset in order to sell products.
European supervisors have warned the European Commission that a Jan. 1 deadline for compliance may be “burdensome” for the industry to comply with, given the level of detailed information required. The European Parliament and Council also may still object to the proposed measures.
Even industry groups dedicated to sustainable investing say the new regulatory setup is confusing.
“We still don't have consensus views across all markets in Europe on what Article 8 and 9 is,” said Victor van Hoorn, executive director at Eurosif, the European Sustainable Investment Forum. “You’re seeing regulators jump into that space and define thresholds or define a bit better what those different products are, and they’re all likely to come up with different local answers.”