Thematic review of sustainability disclosures for funds having sustainable investments as an objective

The Danish Financial Supervisory Authority (the Danish FSA) has conducted a thematic review of sustainability disclosures in prospectuses and key investor information documents (KIIDs) for eight funds that have sustainable investments as an objective (also known as “fully sustainable” funds). The review shows that the management companies (MCs) for the eight funds have not ensured that the funds disclose information on sustainability in a clear, adequate and comprehensive manner. The sustainability disclosures are, therefore, insufficient on several material areas.

The Danish FSA launched the thematic review in June 2022. The review should, among other things, uncover whether investors receive the sustainability information they are entitled to, and whether this information is provided in a clear, adequate and comprehensible manner. For instance, the MC must ensure that the fund discloses which sustainability objectives it contributes to (the sustainable investment objectives), how it ensures that the actual investments are in accordance with the objectives and which sustainability risks the investor assumes. 

”It is important for consumers and investors that they receive sustainability information in a manner which is comprehensible and adequate. It is especially important for the so-called ”fully sustainable” funds, where it must be expected that this information constitutes a key component in the investment decision”
says Henrik Brarup Damgaard, Head of the ESG Supervision unit at the Danish FSA.

The internal processes of the MC and whether these e.g. ensure that the fund invests in accordance with the stated sustainable investment objectives, were not a part of the review carried out by the Danish FSA.

Outcome of the review 

The thematic review conducted by the Danish FSA showed that, in general, the MCs of the eight funds has provided too generic disclosures on sustainability issues. Moreover, in several material areas the information is insufficient, as the information is either unclear, inconsistent or incomplete. 

It must be disclosed in the prospectus, how the fund will attain its sustainable investment objectives, and how the contribution to the objectives is measured. The prospectus must also describe, how it is ensured that the underlying investments in the fund are sustainable. Moreover, there are additional disclosure requirements, if the fund invests in economic activities contributing to an environmental objective. 

The information on how the objectives are to be attained, and how the contribution is measured, is generally incomplete or insufficient. The prospectuses do, therefore, in general, not include sufficient information on, how it is ensured that the funds attain their sustainable investment objectives, and how they measure the contribution to their sustainable investment objectives. 

Where a commitment is made to invest in environmentally sustainable economic activities in accordance with the EU Taxonomy Regulation, it is either not stated – or stated in an inadequate manner – how the investments meet the requirements laid down in the regulation for such activities. The MCs must ensure that information is provided for the funds on e.g. how the investments comply with the thresholds values and requirements for an environmentally sustainable economic activities laid down in the EU Taxonomy Regulation. Furthermore, the prospectuses for several of the funds contain inconsistent and unclear information on the sustainable investment objectives of the funds. 

”When the prospectus does not explain clearly the objectives of the fund or how the objectives are to be attained, it is difficult for investors to understand how the sustainability objectives impact the way in which the investors’ money are going to be invested. For the so-called “fully sustainable” funds, disclosures on how the sustainability objectives are to be attained is a key component in the SFDR”, says Henrik Brarup Damgaard.

In order to ensure that the underlying investments in the funds are sustainable, the MCs must ensure that the funds’ prospectuses describes, among other things, how it is ensured that the investments do not significantly harm any social or environmental objectives, and are made only in companies, which follow good governance practices. 

The Danish FSA notes that the prospectuses for several funds contain insufficient information on, how it is ensured that the investments do not significantly harm any social or environmental objectives. This is due to insufficient information about the processes and criteria used by the MCs for assessing, when an investment is significantly harming any social or environmental objectives. 

The Danish FSA also finds that the key investor information document (KIID) for several funds does not include a description of the sustainable investment objectives of the funds or include a description of the objectives, which is not consistent with the objective stated in the prospectus. 

It should also be disclosed in the prospectus, how sustainability risks are integrated into the investment decisions and the likely impact of sustainability risks on the return of the fund. For several funds in the review, it is not apparent that they have addressed sustainability risks as defined in the EU Sustainable Finance Disclosure Regulation (SFDR). The SFDR defines these risks as environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of the investments. Instead, some of the prospectuses contain information on the result of the funds’ own work relating to sustainability and the impact hereof on the return of the fund. Moreover, for some funds it is stated that sustainability risks may potentially have a positive impact on the return. This is not in accordance with the formal definition of sustainability risks.  

The Danish FSA statements for the individual funds

Based on the insufficient information in the prospectuses and KIID, the Danish FSA has issued orders to the MCs of the eight funds, who must ensure that the disclosure requirements are met. 

”The identified deficiencies relate to material issues and constitute a clear violation of the requirements in, especially, the Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation. For this reason, we have decided to make use of our normal supervisory tools, here in the form of orders. It is important that the investors receive the information, which they are entitled to. A continuous supervision also contributes to maintaining the confidence in financial products and sustainability disclosures,” concludes Henrik Brarup Damgaard.

The individual statements for the companies can be found here (in Danish only):

The Danish FSA will during 2023 publish a memorandum describing what the Danish FSA has identified good practices in this area as a follow up on the review.