Get ready for new ESG regulations

A look at the EU’s new ESG disclosure standards

Michael Maldener, Managing Director & Conducting Officer at Nordea Investment Funds S.A.

ESG investing has been gaining serious traction for some time, but it has been largely un-regulated. Following the EU’s 2018 Action Plan on Sustainable Finance, a new legislative package is currently underway to change that—and investors need to be ready.

The EU has been developing its Action Plan on Sustainable Finance to redirect investments towards sustainable investing (which is needed to enable Europe to meet targets set by the Paris Agreement of 2015 and the European Green Deal) and to provide a framework for sustainability within the asset management space. We can simplify the first regulatory initiatives into three points.

First, the Disclosure regulation will clarify the duties and responsibilities of financial market participants (incl. investment managers and distributors). The Disclosure regulation targets distributors and financial advisors as well as asset managers, so no matter where you are in the value chain, you will have to disclose how you classify your products and how sustainable the underlying investments are. The Disclosure regulation additionally requires the entities to disclose how they deal with sustainability risks in areas such as the investment decision-making process and product classification.

Second, the Taxonomy regulation will provide an aligned vocabulary on environmental aspects, which is aimed at avoiding potential occurrences of greenwashing. When dealing with ESG, sometimes it feels like you do not see the entire forest because of all the different trees. Current regulatory initiatives aim to bring structure to this. The Taxonomy has taken the first steps towards a common set of environmental definitions to be used across the in-dustry.

Finally, updates and amendments will be applied to existing legislations, such as MiFID II, UCITS or AIFMD. We are in the midst of the regulatory process, which means there will be a lot of clarification and alignment to come. That said, we know that MiFID II will require distributors to integrate sustainability preferences into the suitability assessment when providing investment advice or discretionary portfolio management. Sustainability preferences need to be assessed alongside the usual aspects of suitability.

Distributors will need to categorise their products

Providers of products or services in the areas of ESG/sustainability/responsibility will need to categorise and clas-sify their products. While these requirements are not yet fully clear, these changes are significant for distributors, as there will be requirements to assess, document and regularly review the product selection process of a sus-tainability offering.

If they have not taken any action so far, distributors need to start right away to familiarise themselves with the different regulatory initiatives – especially those with a direct effect. It is crucial to understand interdependencies of the initiatives and the impact on value, change and processes.

Essentially, there are three categories of products. The first is those which follow basic ESG considerations but with the investment objective primarily focused on delivering returns. The second category is Art. 8 Sustainable Finance Disclosure Regulation (SFDR) or ESG products. These are dedicated ESG strategies, which include elements such as exclusion and measures on how to ensure governance practices. The third category, Art. 9 SFDR or Impact prod-ucts, has a sustainability objective alongside delivering a financial return.

It is important to stress, investors are not sacrificing returns to move to a higher category, it simply means the sus-tainability requirements are higher. The main challenge for the market is how to decide what the thresholds are. In terms of distribution, the devil really is in the details – as only the Art. 8 and Art. 9 categories are likely to be con-sidered sustainable products, although some further specifications might be needed. If a client desires a sustaina-ble product, you cannot simply offer a basic solution.

We can compare the current situation to the process of moving. As an industry, we have lived in our house for a long time and we are now moving into something new. However, the boxes for our belongings do not fit the things we have—many have not arrived yet. Likewise, this current guidance will be elaborated on in the months and years to come. In the meantime, it is important for advisers to start thinking about their offering and internal processes in relation to sustainable investing. Sustainability offers a potentially huge opportunity to advisors who are early in recalibrating their business model to meet the ESG assessment requirements and offer a good range of sustainable solutions. We will be confronted by many challenges along this journey and we at Nordea are committed to making it easier for distributors. We encourage you to reach out and continue the dialogue.

Related News & Insight

Related Podcast

Related Video

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.

Follow Nordea Asset Management

Track Nordea Asset Management news and insights on the latest investment trends

Track Nordea Asset Management news and insights on the latest investment trends

Listen to Nordea Asset Management news and insights on the latest investment trends

Listen to Nordea Asset Management news and insights on the latest investment trends


The information contained in these webpages is solely intended for professional clients and may contain advertising.

This website is NOT intended for a “US person”. The notion of “US person” includes but is not limited to, any natural person resident in the U.S. and any partnership or corporation organized or incorporated under the laws of the U.S. For a full description of a “US person”, please refer to the General Terms and Conditions.

Data, information and potential objectives released on these webpages are provided for information only.

Nothing in the information contained on these webpages shall be construed as an investment advice from NAM or any of its affiliated companies. The content of these webpages does NOT constitute i) a recommendation to invest in any financial instrument, financial product, investment structure or instrument, ii) tax or fiscal advice, to enter into or unwind any transaction or to participate in any particular trading strategy and (iii) substitute for user’ own research or their technical and/or business judgement based on their personal situation. These webpages are not an offer to buy or sell any security.

All publications, press release and other material including but not limited to video, brochure presented or released on these webpages are presented “as is” and to the best of NAM ́s knowledge when issued.

By clicking on “Proceed” I confirm that I am a professional client and I have read, understood and accept the General Terms and Conditions and the Privacy Policy for this website.

*A Professional client within the meaning of the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 as amended

Oops! Please enable marketing cookies to view content like this from Nordea