Norwegian supervisory action on SFDR

The SFDR (regulation (EU) 2019/2088) was implemented into Norwegian law with surprising speed and has been in effect in Norway since 1 January 2023.

The regulation is a set of disclosure requirements, applicable to "financial market participants" (producers of investment products), and "financial advisers", both at the level of the firms and at the level of each product.

The report is largely organised according to the main articles of the SFDR, addressing shortcomings identified and the expectation of the FSAN. A general issue identified was a confusion between disclosure (and assessment of) sustainability risks on the one hand, and adverse sustainability impacts on the other.

– Integration of sustainability risk

Article 3 requires  website disclosure of how sustainability risks are integrated into investment decisions or advisory process. It is a comply or explain provision.

The FSAN found that several firms neither complied nor explained. The FSAN found that those who did disclose  often provided very general and non-committal information.

Article 6 requires firms to provide pre-contractual information on the manner in which sustainability risks are integrated into investment decisions and likely impacts of sustainability risks on the return of relevant financial products. This is also a comply or explain provision. 

The FSAN found that disclosures often seem to confuse sustainability risks and adverse impacts. The FSAN states that it expects entities complying to provide information on main identified sustainability risks per product made available, and mitigating measures implemented. 

Remuneration policies and integration of sustainability risks

Article 5 requires firms to include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks, and publish that information on their websites. 

The FSAN states that this is not a comply or explain-provision. The FSAN emphasises that also sub threshold AIFMs (that are not subject to remuneration rules), must comply with this provision, and effectively adopt a remuneration policy.

In our view, firms that do not integrate sustainability risk, and have disclosed as much in accordance with article 3, do not need to amend their remuneration policies. All other firms however, must have in place remuneration policies that are consistent with sustainability risk, as otherwise taken into account by the firm, and the policy must explain how this is the case. 

Adverse sustainability impacts at entity level

Article 4 requires firms to disclose information (based on standardised templates) on due diligence policies with respect to such impacts, prioritisation, mitigating action, information on engagement policies and adherence to standards. This is a comply or explain provision (for firms with less than 500 employees).

The FSAN found that firms taking into account adverse impacts generally provided weak disclosures. In particular the FSAN addressed that firms did not provide any reasons for the selection and priority of principal adverse impacts, or how progress is measured.

For firms that do not take into account adverse impacts, the FSAN held that their explanations were insufficient. In our view, the SFDR may not be construed in this way: Article 4 requires firms to provide "clear reasons" for why they do not consider adverse impacts, not "good reasons".

Adverse sustainability impacts at financial product level

Article 7 requires firms that do consider adverse impacts at firm level (cf. article 4) to disclose whether they do so at product level. 

The FSAN emphasises that firms that do not consider adverse impacts at firm level still may choose to make available products for which adverse impacts are considered.

Promotion of environmental or social characteristics in pre‐contractual disclosures

Article 8 is a core provision of the SFDR, when it comes to combating greenwashing, as it requires standardised and extensive disclosures in respect of products that promote ESG characteristics.

The FSAN holds that use of sustainability related product names, references to eco-labels as well as sustainability related product description or marketing, or information on sustainability factors being relevant to investment decisions, will be construed as "promoting" ESG characteristics and trigger disclosure requirements.

Where managers are making more sweeping ESG-claims at entity level, the FSAN would at the outset hold all its products to promote ESG characteristics and require disclosures at product level. 

The FSAN also informs that that feeder-funds to Article 8-funds also must be article 8-products and the feeder AIFM comply with relevant disclosure rules (and correspondingly in respect of Article 9-funds). In our view, this is not correct: The portfolio management and risk management of a feeder fund does not replicate that of its master fund: It is limited to the investment and divestment of its interest in the master fund in accordance with its risk limits. Whether the master fund is an Article 8 or Article 9 product is a matter for such master fund.

As a general observation, the FSAN underlines the importance of not confusing sustainability risk and adverse impacts, or addressing sustainability risk in connection with assessing whether an investment is sustainable in the meaning of the SFDR.

Promotion of environmental or social characteristics and of sustainable investments in periodic reports

For Article 8-products, Article 11 requires that periodic reports disclose the extent to which environmental or social characteristics are met. 

The FSAN review covered both investment firms making available model portfolios, and fund managers making available Article 8-funds. The FSAN found a general lack of information on how external data were to be interpreted with respect to whether characteristics are met – if there has been progress or not. The FSAN expects firms to provide information on how external data have been developed, including whether they are based on objective data or estimates.

The report shows that smaller firms may be better off by opting out to the largest extent possible, and instead working towards ESG incrementally in order to have sound policies before outward promoting ESG characteristics. 

Firms already having "opted in" cannot readily backtrack and will have to review their policies and disclosures to get at the level the FSAN requires. For some, this may require a fair amount of work.

It is safe to say that few are satisfied with SFDR. The rules are complex and few firms actually comply. This compels supervisory authorities to act. The ESG concept of the SFDR is broad and not limited to environmentally sound investments. This renders it less effective a tool for aiding the green transition, which is the main purpose. Middling level of compliance by firms also means that most investors likely do not receive very good information. For firms it adds to the compliance burden and costs.

Against this backdrop, the SFDR is currently under review. The EU Commission is expected to publish a proposal towards the end of the year. Ideas pushed forward by the Platform on Sustainable Finance in December 2024 would grow the rules even further. It remains to be seen whether the current simplification drive will take SFDR in another direction. The FSAN has argued for this in its contribution to the review. 

In our view, the SFDR should be scaled back: Making false or misleading claims in marketing is prohibited regardless of the SFDR. Both firms and investors/clients would benefit from a clearer scope where only products promoting ESG characteristics or having a sustainable investment purpose would be in scope. This would make it possible for firms not promoting ESG characteristics to fully opt out.