NordicInvestor hosted a panel of asset owners, allocators and asset managers who are closely monitoring the evolving SFDR and other related EU regulations. The three SFDR categories are never likely to be a perfect label for every definition of sustainability- and indeed were never intended to be. It is a gross oversimplification to dub article 8 as “light green” and article 9 as “dark green”, when both of them could contain companies that some investors view as “brown”, (not to mention firms on some investors’ ESG exclusion lists for social or governance reasons, such as pornography or shareholder voting rights). Many investors, and some fund ratings agencies, are setting a bar for sustainability that is higher than the minimum criteria for SFDR.

You can read the summary in this article or watch the video below.

Look out for our upcoming report for more insights into how Nordic investors are approaching ESG.


  • Louise Kooy-Henckel, Associate Director at Wellington Management in London, leads the firm’s sustainability drive in EMEA, working with investors and clients on their own sustainability programs, which include ESG integration, climate and impact. She is also an investment director specialized in impact investing in equity and fixed income. She joined Wellington in 2016.
  • Anders Bertramsen, Head of Alternative Investments & Manager Selection at Nordea Asset Management, is mainly involved in sourcing and selection of managers for both white label Nordea branded products and third party branded offerings.  He also oversees illiquid investments such as private credit through funds of funds and co-investment programs. He has worked at Nordea since 2010.
  • Erik Edward, Senior Fund Analyst at Swedbank, whose team is responsible for a fund platform of 550 funds, and also the bank’s strategic asset allocation. He has worked at Swedbank since 2010, having previously been a portfolio manager in the multi-asset team at Swedbank Robur. 

SFDR Objectives: disclosure, labelling or marketing?

The SFDR intentions to improve transparency and comparability, combat greenwashing and help transition to a lower carbon economy, are worthwhile and well understood, but some parts of the investment industry are trying to use it as a streamlined and expedited (or possibly even “quick and dirty”) labelling and marketing tool.

“The SFDR was designed as a disclosure regime, but has turned into a marketing exercise where asset managers, fund ratings agencies, and some journalists, jump to positive or negative conclusions based on the percentage of funds that are article 8 or 9,” argues Anders Bertramsen.

We do our own assessment and we would love to say that we do not care about the category 8 or 9 label, but we also have to deal with analysts who insist on article 8 for marketing. Article 6 versus article 8 has become a huge issue,” he adds.

The commercial pressure on asset managers to shoehorn products into article 8 could lead some of them to cut corners and take shortcuts.

Since the article classifications are self-certified, this increases the risk of greenwashing,” suggests Bertramsen.

Some fund ratings agencies would appear to agree: Morningstar announced in February 2022 that it has, as of year end 2021, removed 1,200 funds with USD 1.4 trillion of assets from its “sustainable universe” based on disclosures in their prospectuses and annual reports, including many that are self-classified as sustainable.

If the SFDR labels do not guarantee quality control the disclosures could be a solution:

“We need to understand what a manager says they are doing, and what they are actually doing. We do not always agree with article 8 or 9 labels but we think that the RTS disclosures should reduce the risk of greenwashing, because managers have to prove and report what they are doing,” points out Erik Edward.

The implication is that the SFDR may not rule out greenwashing, but it potentially allows (at least sophisticated and/or professional) allocators and investors to make an informed decision about whether or not a fund might meet their approach to sustainability – or fall into their definition of greenwashing.

Deep dive due diligence

This creates more work for investors and advisers to clean, harmonise, cross reference, compare, digest and interpret the disclosures and data.

The SFDR is well intentioned, and a step in the right direction, but incredibly complex. You need to dig deep to understand what a manager is actually doing,” finds Bertramsen.

Louise Kooy-Henckel agrees: “We have great empathy with asset owners, who will have to do more due diligence than before to understand how green a fund is and how it defines sustainability”.

Once investors have got to grips with the data and disclosures, they can start to form a view on their preferred SFDR approaches: the long term ideal is that competition should define best in class SFDR products,” she expects.

Differences between European investors

The SFDR may apply throughout the EU, and EEA, but a single fund might not suit all markets so products may need to be tailored to different investors in Europe. It was never realistic to expect a regime with three categories to remove the need for due diligence when there are multiple schools of thought in ESG investing. There are differences between the Nordic countries, between them and European countries, and across different European countries – and also divergences within countries according to institutional and retail investor policies and preferences. For instance,

the Nordics tend to take a strict hard line on exclusion while the UK focuses more on decarbonization via engagement. We see a mix of approaches elsewhere in Europe, observes Kooy-Henckel.

Differences between exclusion lists, and policies for external managers’ exclusions

The quickest and easiest way to satisfy SFDR article 8 is simply exclusions, which is how many investors’ ESG policies started several decades ago, but despite some overlaps there is no complete consensus on exclusion lists

“Article 8 is really broad, and exclusions or benchmarks alone are not enough to match client preferences. A passive index tracker product could be article 8 purely based on an ESG benchmark, which might contain energy companies that some clients cannot invest in,” explains Louise Kooy-Henckel.

Various article 8 products contain oil, gas and nuclear. Even within the most commonly excluded energy sector, coal, there are different policies around maximum thresholds for thermal coal and exceptions for credible transition plans, while coking or metallurgical coal is sometimes carved out of exclusions altogether.

The implication is that screening of SFDR funds may need various filters to match investors’ exclusion lists, though allocators’ policies on applying exclusions to external managers do vary. Some fund pickers leave external managers some latitude over exclusions, while others apply a hard and fast policy.

“Being based in Sweden comes with a legacy in that Swedbank cannot finance certain areas,” says Edward.

Swedbank’s growing exclusion list covers public and private companies. It excludes: public firms for human rights issues; coal being over 5% of company revenues (including both thermal and metallurgical or coking coal), and controversial weapons, including nuclear weapons and cluster munitions. Some private firms are also excluded for controversial weapons.

In contrast, Nordea’s own exclusion list does not apply prescriptively to external funds and it makes judgement calls about differences between its own exclusion list and that of managers.

if they are invested in any stocks we exclude, we will need to discuss the issue with them and might revisit whether we want to stay invested. Engagement should not be an excuse to avoid exclusions or keep a broader investment universe for ten or more years,” argues Anders Bertramsen.

PAIs and Taxonomy alignment

Whether and to what extent it is realistic for fund selection to be based on the Principal Adverse Impact (PAI) disclosures is debateable. There are 16 PAIs and giving investors and a la carte menu of PAIs to exclude would be a complicated exercise, which would probably only be feasible for customized mandates rather than comingled funds.

Taxonomy alignment might, on the face of it, seem simpler.

“16 PAI indicators is too many. We expect to see a single number on sustainability measuring taxonomy alignment,” says Bertramsen. However, taking a step back, some investors might not agree with the taxonomy itself. 

There will be debates over which companies are eligible for the taxonomy,” he admits.

For instance, if the taxonomy does end up including nuclear and gas, then some investors may in fact want to avoid alignment with either or both of these taxonomy elements, even though they might welcome alignment with other parts of the taxonomy. And arguably coal companies with transition plans might fit into the SFDR but not the taxonomy.

It is also possible that some SFDR sub-divisions could consider both taxonomy alignment and some defined groups of PAIs. MiFID rules will very soon force the SFDR categories to spawn new branches to accommodate investor preferences.

The biggest MiFID issue is how to match funds to investors’ sustainability preferences, according to Edward.

From August 2022, we have to apply MiFID rules on investor preferences for sustainability. This will add more complexity and sub-divisions within SFDR categories, to set minimum percentages of alignment with the taxonomy, or to avoid certain PAIs, or both. We expect four SFDR sub-divisions based on alignment with the taxonomy and PAIs,” says Kooy-Henckel.

Energy transition from brown to green

The widest differences of opinion for ESG in general (and potentially some PAIs/taxonomy elements) are around energy transition.

Are energy companies un-investible? Are some of them part of the solution in terms of transition, engagement and setting science-based targets? And should investors choose the best in class energy companies versus the benchmark? We see most polarization around this issue,” finds Bertramsen.

Nordea has significant distribution outside the Nordics. We see some Nordic managers can be very strict on energy, while investors in Southern Europe or South America and big global players do not have the same exclusionary mindset. It is hard to find one size fits all”.

The energy transition debate partly hinges on how much confidence investors place in the power of active ownership and engagement.

“If we steer all capital towards green sectors, what happens to the brown? There is a debate over whether to exclude oil and gas, or bring it down, or engage through active ownership. Our portfolio managers would rather engage and set credible science based targets than exclude, but some investors are not willing to have a conversation about engagement and decarbonization,observes Kooy-Henkel.

Defining, measuring and documenting effective engagement

Engagement and proxy voting can inspire, force, accelerate or improve companies’ energy transition, and require a partly qualitative assessment of processes that cannot be captured by three SFDR categories.

“Engagement is often being left out of the conversation”, says Kooy-Henckel.

Edward agrees that, SFDR could lead asset managers to pay less attention to engagement, especially to companies that are transitioning to lower carbon models. We ask external managers to see a written process and engagement reports”.

It is important to gauge quality and not only quantity of engagement.

Sending a letter to 5,000 companies is not 5,000 engagements. We also need to know the consequences if engagement does not work and determine a timeframe of measuring success,” says Bertramsen.

Judgement needs to be exercised to arrive at sensible deadlines: timeframes depend on ambitions for the size of the engagement and we should not set arbitrary rules. A small change should not take three years. A larger change shutting down 50% of production might take more time.” Bertramsen adds.

Even the largest asset managers need to prioritise engagement resources:

there is a big move from measuring activity to measuring outcomes. All of our teams track all engagements in terms of the end goal, milestones and how actions taken impacted the way of thinking. They get email alerts of they fail to engage. We need case studies but realistically cannot write up every single one,” acknowledges Kooy-Henckel.

Bertramsen rather cynically suspects that,the good engagements become the focus of case studies. We also need to see what happens when engagement does not work so well.”

Allocators also engage with external managers. For instance, Swedbank has had discussions about how managers might integrate ESG into sovereign debt.

Firm or product level ESG appraisals?

Allocators’ approach to ESG for external managers can emphasise ESG policies at the level of the firm or the individual product, and it could be formulaic or more subjective.

We score investment managers on governance and risk and it is more or less binary. If they fall below a certain score, we cannot recommend them. If they have an acceptable score we move on with our due diligence of the investment strategy itself,” says Edward.

We have no fixed formula. We apply qualitative assessment in a standardized framework and experience. ESG is usually a combination of firm and fund level,” says Bertramsen.

“The process is also different for white label and third party branded products. For white label managers, we can set the guidelines ourselves, hence we have more influence on the final portfolio whereas you can only to a limited extent impact guidelines in 3rd party funds,” he explains further.

A top down, firm-wide ESG policy could ensure consistent and harmonized policies and implement them faster, but some firms leave portfolio managers with varying degrees of freedom to develop their own ESG approach. For instance, Wellington prioritises sustainability but does not prescribe precisely how each manager applies it.

Culture and commitment are important. For the past 5 years our CEO has communicated sustainability as being a key objective. However, we do not have a CIO telling managers how to do ESG from the top down. Subject matter experts or coaches work with every team and PM to implement ESG from the bottom up, intrinsically aligned with the PM’s philosophy and investment approach so that the PM believes in driving it forward and is accountable. We think that this is more sustainable for long term implementation, argues Kooy-Henckel.

ESG priorities could vary between asset classes and strategies. For example,

European smaller companies employ 50% of the workforce, and make up half of GDP. and they need bottom-up analysis including a focus on the social metrics such as labour. Therefore we would want to prioritise these metrics for a European small cap article 8 fund,” Kooy-Henkel points out.

Data gaps and inconsistencies create opportunities for active managers 

Smaller companies in general require extra in house ESG (and regular investment) research by asset owners and asset managers, partly because they may have little or no coverage from third party ESG ratings agencies (or indeed sell side brokers).

In any case, even for larger companies, the backward looking, often erroneous and subjective nature of ESG data is a source of frustration for some investors – but also spells opportunity for managers.

It is a blessing that the data is not perfect. If it was perfect it would be like credit ratings agencies which are 90% correlated. The 40% correlation between MSCI and Sustainalytics is healthy. Sometimes they are aligned and sometimes not,” says Bertramsen.

The differences can be explained by judgements and priorities, and by weighting schemes even where agencies have the same opinion on corporate activities or behaviour.

“A low correlation between rating agencies’ methodologies and materiality frameworks lets active managers add value,” says Kooy-Henckel.

“Asset managers need to build up their own ratings based on deep fundamental forward-looking research, emphasizing what is material,” she adds.

Investors’ desire for harmonized ESG scores can however “cramp the style” of managers who want to “strut their stuff” by doing their own research.

It is pointless for managers to build their own models and ratings if clients then set minimum MSCI ESG ratings. There will be differences between asset managers’ ESG scores, just as there are for the ratings agencies” explains Bertramsen.

Realistic and practical client reporting

Due diligence is getting more complicated, but insisting on the most extensive reporting could create a barrier to entry favouring large managers over boutiques. In any case, end clients still need something digestible.

“We are seeking to educate advisors and clients about sustainability and EU regulations. We are adding themes and key ratios to our fund lists but it is not easy,” admits Edward.

“Reports from 10 providers may be difficult to compare on commonalities. The SFDR RTS may improve that, but reports could also become too long. A 23 page report may be too much to digest and some clients will want to see key numbers on one page,” says Bertramsen.

Some degree of simplification is necessary to distil copious data into a digestible report, but three SFDR categories alone are clearly not enough and adding the taxonomy will not always be a solution.