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New EU regulation to transform sustainable investments

Sustainability is high on the agenda in the public debate and in the asset management industry. A series of new regulatory initiatives from the EU will reshape responsible and sustainable investments and create further opportunities and transparency for investors.

Up until now, sustainable investment definitions have been less standardised than the definitions used in many other areas of asset management, and asset managers have been freely able to use terms such as ‘ESG’, ‘responsible investments’ and ‘sustainable investments’. But on 10 March 2021, the field of sustainable investments will see the introduction of the first in a series of regulatory initiatives to standardise responsible investment disclosures. On this date, the Sustainable Finance Disclosure Regulation (SFDR) will enter into force as the first major regulatory change stemming from the EU Action Plan on Sustainable Finance.

According to Christian Heiberg, Head of Asset Management, the initiative provides a much-needed common language that will fundamentally change the way the financial sector works with sustainable investments.

“Although the regulatory initiatives in the EU action plan are at different stages of development, the direction is clear. And asset managers and financial advisers will have to adjust their operations significantly and prepare for this paradigm shift,” explains Christian Heiberg.

Regulatory changes can make great opportunities

Christian Heiberg also believes that the coming regulation will create interesting opportunities for those asset managers who succeed in using the new requirements to create strong products that appeal to the growing number of customers who have a preference for ESG and sustainability.

The regulation creates greater transparency on sustainable investments, and it makes it much easier for customers to understand the sustainable characteristics of their investments and to compare across products and financial providers.

“The regulatory initiatives represent a great opportunity for Danske Bank to take a leading position in sustainable investments in the Nordic region by further integrating sustainability into our investment processes and products. We’re well positioned to embrace the coming regulation because as well as having a strong foundation of data, tools and processes, we also have dedicated investment teams and an organisation that’s able to execute the work required. This also means that we will continue to support our customers by providing them with investment products that meet their sustainability-related preferences,” says Christian Heiberg.

Challenges in monitoring

Although Christian Heiberg seems positive, he does admit that he also sees some challenges. One of the consequences of the SFDR regulation is disclosure of sustainability efforts at entity and product level and disclosure of how sustainable products achieve their objectives. He fully supports the EU’s efforts to create a more transparent market for sustainable investments, but he sees substantial practical tasks ahead. Christian Heiberg continues:

“We’re in the processes of building a stronger infrastructure to be able to monitor sustainability-related characteristics in our investment products and processes. For this purpose, we’ve established a new sustainability risk challenger role that will monitor and challenge the portfolio managers and their investment processes on how they’re addressing sustainability risks and promoting environmental and social characteristics.”

What comes next?

The next regulatory initiative to be introduced will be the MiFID II amendments, expected to be brought in at the beginning of 2022. These amendments will for instance require that financial advisers include environmental, social and governance (ESG) considerations in their investment advice. Also in 2022 and continuing into 2023, the Taxonomy Regulation will come into effect, which will set a unified classification system for environmentally sustainable economic activities.

“We expect further requirements to be introduced for our processes, products and customer dialogues over the coming years. Because of this, we’re maintaining an intense focus on the coming regulation, and we’re preparing ourselves by continually strengthening our sustainability and ESG processes,” says Christian Heiberg.

The Sustainable Finance Disclosure Regulation (SFDR)

One of the purposes of the Sustainable Finance Disclosure Regulation (SFDR) is to protect investors by requiring disclosure on the integration of environmental, social and governance (ESG) matters into investment decisions and to prevent greenwashing.

More specifically, the regulation focuses on:

  • standardising information on sustainability risks
  • creating common disclosures for ESG and sustainable products
  • creating greater transparency on the adverse impacts investments have on sustainability factors

The EU Action Plan on Sustainable Finance

In 2015, the EU and many other nations adopted the UN’s 17 sustainable development goals (SDGs) and signed the Paris Agreement. To ensure that these commitments will be met, the EU developed a plan for a climate-neutral economy. In March 2018, the European Commission adopted an action plan on sustainable finance as part of a strategy to integrate environmental, social and governance (ESG) considerations into its financial policy framework and to mobilise finance for sustainable growth. The aim of the action plan is to:

  • Reorient capital flows towards a more sustainable economy
  • Mainstream sustainability into risk management
  • Foster transparency and long-termism

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