Asset Management | Enforcement actions in Denmark for SFDR non-compliance

Summary of findings – sustainable investment
In September 2024, the Danish FSA initiated inspections focusing on compliance with SFDR requirements for funds marketed as having sustainable investment objectives, specifically Article 9 funds under SFDR. The inspections examined the firms’ methods and processes to ensure that their investments qualify as sustainable, including adherence to good governance practices, which is relevant also for managers of products subject to Article 8.
The Danish FSA recently published its findings concerning three Danish asset managers. Overall, all firms lacked sufficient methodology and processes to ensure that investments met the three requirements for “sustainable investments” in the SFDR Article 2 (17):
Contribution to an environmental and/or social objective:
- Lack of clear criteria: The firms lacked clear criteria for determining when an investment contributed to an environmental and/or social objective.
- Insufficient compliance processes: The firms lacked internal policies and processes to ensure sufficient monitoring of compliance with the requirements for contributing to an environmental and/or social objective.
- Delegation without oversight: One firm had delegated the assessment of “contribution” to an external party, without being able to describe the methodology that was applied.
- Reliance on “intentions”: One firm relied on investee companies’ GHG emission reduction intentions rather than current and future emission reductions.
Do no significant harm (DNSH):
- No use of PAI indicators: The firms did not adequately use the indicators for principal adverse impacts (PAI) when conducting the DNSH-assessment (or was not able to document the same).
- Lack of criteria or thresholds: The firms lacked clear criteria or thresholds for determining when an investment caused significant harm to the PAI indicators.
- Transition: One firm applied more lenient DNSH-criteria for transition companies which was deemed non-compliant.
- No offsetting: One firm allowed positive contributions in certain areas to weigh up for harm in other areas, which was deemed non-compliant.
Good governance:
- Absence of clear criteria: The firms did not have clear criteria for when a company would be excluded due to non-compliance with good governance practices
All three firms were ordered to correct the compliance gaps identified.
Summary of findings – international standards
For one of the firms, the Danish FSA also inspected adherence to certain international standards that the firm claimed to consider in its investment activities. Specifically, the firm states that it considered the UN Global Compact, the UN Universal Declaration of Human Rights and the ILO Conventions.
The Danish FSA found that the firm lacked sufficient methods and processes to ensure that these standards were actually considered and adhered to in the investment process. Additionally, the Danish FSA pointed out that the firm had not incorporated compliance with these international standards into its internal reporting, making it difficult for management to assess whether the firm had adequate processes and policies in place to ensure compliance.
What should Norwegian asset managers do?
The expectations set out by the Danish FSA in the cases referenced above are consistent with guidance published by European Supervisory Authorities through SFDR Q&As. The Financial Supervisory Authority of Norway is expected to interpret the SFDR and its requirements in a similar manner as the Danish FSA.
Based on the specific findings by the Danish FSA, we recommend Norwegian asset managers to:
- Formulate criteria for ‘good governance’ (Article 8) and ‘sustainable investments’ (Article 9): Managers should formulate their criteria for determining which investments meet the requirements for sustainable investments under SFDR Article 2 (17). A mere discretionary assessment of prospective or existing investee companies’ ESG policies and practices is insufficient. Importantly, this principle also applies to the good governance criteria, meaning that all managers of funds subject to Article 8 must establish clear criteria for when this requirement is deemed fulfilled, and make sure to document the same for each investment, at entry and continuously during the holding period. The criteria must be tailored to the investment strategy of the product and applied consistently across all investments of the product. The criteria should be embedded in relevant investment procedures or a separate SFDR compliance procedure, and appropriate checklists and other supporting compliance and control measures should be implemented.
- Document assessments: While substantial amounts of data may be gathered during due diligence and continuously during the holding period, we observe that there is often little or no documentation concerning how this data is processed and how it informs decision-making. Asset managers should document the underlying assessment of how it determines whether the requirements for sustainable investments are met (including by reference to relevant thresholds).
- Establish appropriate compliance processes: Managers of funds subject to Article 8 or Article 9 should ensure that the internal compliance and control procedures and processes, including internal reporting, appropriately reflects the commitments that apply to each fund under management. This may include compliance checklists and internal and/or external control measures, such as compliance committee review and approval for new investments.
- Assess commitments to international standards: The findings by the Danish FSA regarding compliance with international standards should not be overlooked. Several Norwegian asset managers claim to adhere to one or several international standards relating to business conduct. Examples include UN Global Compact, UN Principles for Responsible Investment, UN Guiding Principles for Business and Human Rights, OECD Guidelines for Multinational Enterprises, the OECD’s Responsible Business Conduct etc. It is not unlikely that the Norwegian FSA may turn its focus towards such claims. Certain managers may find that they have claimed adherence to certain international standards – or committed to the same in side letters – without being able to document compliance. This should be a focus area moving forward to either ensure compliance or reassess whether such claims may be misleading and a potential risk of liability.
BAHR comments
While the consequences of non-compliance for the three Danish firms in question were that they were ordered to correct the non-compliance identified, non-compliance with requirements related to sustainability may have other implications. Managers may have undertaken contractual commitments towards fund investors concerning SFDR, and regulatory non-compliance may expose the manager to risk of liability towards investors. In addition, managers that severely violate SFDR, and its requirements for sustainable investments in particular, may risk allegations of greenwashing and reputational concerns.
It should be noted that the European Commission is in the process of reviewing the SFDR and is expected to put forward a revised regulation in the second half of 2025. The European Supervisory Authorities have advised the Commission to depart from the Article 8 and Article 9 regime, and to reconsider the definition of ‘sustainable investment’ in the SFDR. However, the implementation of such changes, if proposed and subsequently adopted by the co-legislators in the EU, will take time. Norwegian asset managers should therefore invest sufficient resources in ensuring compliance with the requirements that apply today, while simultaneously preparing for the navigation and strategic decisions that will be required once the EU regime for sustainable finance is revised and renewed.