SFDR enforcement: Danish regulator says “Managers need to be better at ensuring that their investments are truly sustainable”

In September 2024, the Danish Financial Supervisory Authority (“DFSA”) conducted thematic inspections of three Danish investment managers focusing on their compliance with sustainable investment requirements and international standards for products with sustainable investment objectives (Article 9 funds) under the Sustainable Finance Disclosure Regulation (“SFDR”). In the following briefing we consider how asset managers might incorporate these learnings into the procedures and policies for their own funds.

SFDR is coming of age

Since the introduction of the SFDR, there have been several rounds of Q&As from the European Supervisory Authorities (“ESAs”) clarifying certain areas of the legislation including in relation to mandatory indicators to measure adverse impacts on sustainability factors. And in the last year, we have started to see European financial regulators shift from supervising compliance with the SFDR to enforcing (we reported on some enforcement actions at the end of last year) as financial market participants become more experienced in complying with the SFDR. 

It is particularly helpful to see regulator guidance for investment managers on the Article 9 Do No Significant Harm assessment given that there is little other official guidance available. Although helpful, it must be remembered that the guidance represents the Danish regulator’s view and other European regulators could take a different approach to compliance with the SFDR. 

DFSA enforcement statements – what do they say?

On 21 March 2025, the DFSA published statements in respect of each of the investment managers. The DFSA found that all three asset managers had one or more significant shortcomings in complying with the SFDR. In its enforcement statements, the DFSA required these shortcomings to be remedied and reminded all providers of sustainable investment products to implement sufficient internal processes to ensure that requirements under the SFDR are met, otherwise investors are at risk of getting a different product than they were originally promised. 

Key takeaways: 

• Do no significant harm (DNSH) assessment: The DFSA found one asset manager’s process for the DNSH assessment was insufficient to ensure that no significant harm is actually done to environmental or social goals on the following basis: 
  • the model used meant that positive contributions can outweigh the damage that the investments do to environmental or social conditions. This is complemented by norm-based and activity-based exclusions; and 
  • more lenient exclusion requirements are applied to transitioning companies (ie becoming more sustainable but not currently sustainable). As a result, the asset manager was unable to ensure that no significant harm was being done on a particular day. 

The DFSA also found none of the asset managers’ processes had taken into account all (or any in one case) of the mandatory indicators to measure adverse impacts on sustainability factors (“PAI indicators”)

• One asset manager had either not set criteria or thresholds for several of the PAI indicators or was unable to sufficiently demonstrate that the indicators had been taken into account; and 
• Two asset managers, had processes which focused exclusively on selected parameters for their calculation and no clear criteria or thresholds had been set for when the negative impact was significant enough for an investment to be unsustainable. 

This led to an overall risk that products may contain investments which do significant harm to either environmental or social goals: which is incompatible with the SFDR’s requirements.

The list of additional SFDR queries submitted to the European Commission by the ESAs on 9 September 2022 included questions on the consideration of PAI indicators. The guidance given by the DFSA that all mandatory PAI indicators must be taken into account (and that this should be demonstrated) is supported by the response in question 6 of the Commission’s response (the “April 2023 Q&As”) which is clear that financial market participants must disclose the methodology they have applied, including how they have determined how investments do not cause significant harm to any environmental or social objective (see Question 1). 

• Delegated responsibility meant inadequate methodology for identifying contribution to environmental or social objectives: For one of the Article 9 funds, the process to ensure the investment contributed to environmental or social objectives was delegated to an external manager. The asset manager had not sufficiently considered or was unable to account for the external managers’ method of classifying when an activity contributed to an environmental or social objective. The asset manager also lacked management documents for ongoing calculation and monitoring of the contribution. Both leading to the risk that the sustainable investments in the product did not contribute to an environmental or social goal. 
• Ensuring and measuring contributions to an environmental or social goal must be based on clear criteria and thresholds: The DFSA found that one manager’s method and process for ensuring and measuring contributions to an environmental or social goal were largely based on the investee companies’ intentions to reduce greenhouse gases in the long term, rather than the companies’ actual reductions, resulting in a risk that the product does not contribute to an environmental or social objective during the time they are included in the product and that they are therefore not sustainable. 
• Good governance practice for unsustainable investments: The DFSA criticized the methods that one manager had to ensure investee companies comply with good governance practices and failed to have a clear criteria for when an investment cannot remain in the product as a result of a breach of good governance practice. As a result, the frameworks for assessing good governance practice were insufficient. It is necessary for managers to have methods and documented processes that ensure that investee companies in products that disclose pursuant to Article 8 of the SFDR follow good governance practices. This will avoid investee companies being included in products when they have material breaches of good governance practices, such as sound governance structures, employee relations, remuneration of staff or tax compliance. Companies need to have methods and documented processes, both at the time of investment and on an ongoing basis, to ensure that the investee companies follow good governance practices and disclose pursuant to Article 8 of the SFDR. This is consistent with ESMA’s Q&As on sustainability-related disclosures in November 2022, which are clear that funds may not include companies which do not follow good governance practices. Funds which do are in breach of Article 8 of the SFDR. Question 1 of the April 2023 Q&As is also clear that the methodology for determining how investee companies meet the ‘good governance practices’ requirement must be disclosed. 
• Using climate benchmarks: One product’s sustainable investment goal is contributing to achieving the goals of the Paris Agreement. It uses an EU climate benchmark for greenhouse gas emissions to measure and ensure that goal is met. However, the product’s periodic reporting indicated that the product’s total greenhouse gas emissions had significantly exceeded the emissions of the reference benchmark and that the greenhouse gas emissions of the product had significantly increased over the past year whilst the emissions of the reference benchmark had decreased. The DFSA found that the asset manager lacked sufficient methods and processes to ensure that the emissions from the product's underlying investments were reduced in line with the chosen reference benchmark, resulting in the product not delivering what was promised to the investors. 
• International Standards: The same product stated that all investments would be assessed against a number of international standards including the UN Global Compact principles, the UN Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work. The DFSA found that asset manager did not have a sufficient method in place to ensure compliance with these standards and insufficient ongoing reporting to management on compliance with international standards. Therefore there was a risk that the asset manager may unknowingly violate the referenced international standards without it being discovered and without management being informed. Companies must have such processes and procedures in place to ensure compliance. 

The statements published by the DFSA are helpful for managers to consider against their own processes and procedures to ensure that their processes and procedures are fit for purpose and compliant with the SFDR and complement the already existing guidance from the ESAs and the Commission. 

As a result of the DFSA’s findings, the national regulator has now urged asset managers to do better at ensuring their investments are sustainable as well as providers of sustainable investment products to have sufficient internal processes and procedures to ensure they meet the requirements under the SFDR, otherwise more enforcement actions will be issued. 

What’s Next?

We can expect to see more enforcement of compliance with the SFDR from national regulators. More generally, we await further news on the review of the SFDR and how it will dovetail the changes being proposed under the Omnibus Simplification Packages – we will keep you up to date. 

Our global ESG group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following developments in ESG regulation very closely so please get in touch if you would like to discuss. 

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This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter, Julia Cripps, Emily Julier and Jessica Dhodakia.