Sweden’s Article 8 dominance: miracle or mirage?
Joakim Ahlinder, head of investment strategy and analysis at the Swedish investment consulting company Coin, was recently asked by a client to find a Swedish index fund without any ESG screening or exceptions. He fought on. In the end, he could only find one.
This is a telling example of the Swedish fund market, where as much as 92% of Swedish Ucits and alternative investment funds were classified as Article 8 strategies at the end of 2021, according to the European Fund and Asset Management Association.
But according to Ahlinder, parts of the Swedish fund industry believe that the threshold for an Article 8 label is too low.
‘Many people [in Sweden] thinks it is too easy to be classified as Article 8, he said Citywire voters.
– One can question how sustainable the funds really are. The fact that so many funds are Article 8 is quite remarkable, and I guess many of them will need to change their SFDR classification, he added.
Lives up to the label
Sweden’s Article 8 dominance stands in stark contrast to the European average of 22%.
In fact, no other country in Europe is even close to having the same market share of Article 8 funds. In second place, and 42 percentage points further ahead, is Belgium. It has 50% Article 8 funds on its market. Norway, which is high on the sustainability tables in all other respects, has 41%.
The contrast between Sweden and other European countries has been identified by Marc-André Bechet, Deputy Director General of the Association of the Luxembourg Fund Industry, as an indication of a fragmented implementation of the Sustainable Finance Disclosure Regulation (SFDR).
During a CEO panel at the European Asset Management Conference in March, Bechet attributed Sweden’s progress not as a result of its sustainability work, but to differences in the interpretation of SFDR.
But Johanna Fager Wettergren, head of sustainable economics at Finansinspektionen, does not agree with that theory.
“I have not noticed any significant difference in the interpretation. But I have the impression that there is a common ambition [in the EU] to interpret it the same way, she said Citywire voters.
What is important to note, Fager Wettergren added, is that there are currently no thresholds or methodological requirements for Article 8 funds.
“We do not have the technical standards that define what an Article 8 or 9 fund is, and there is a lot that the industry is still waiting for. Article 8 funds can look very different,” she says.
Regulatory compliance
Finansinspektionen has played an active role in the industry’s broad adoption of the SFDR label.
In October last year, 18 funds that were marketed as sustainable without having an SFDR rating were identified, and pressure was put on the funds to adopt a label. For Fager Wettergren, it is about ensuring that the marketing of sustainable funds lives up to the SFDR label.
“A product may not be marketed as sustainable when it is not classified as such. This is about providing better information to customers, and the SFDR regulation is there to discourage misleading marketing, she said.
Due to the increased demand for ESG products, Finansinspektionen has identified greenwashing as one of the biggest risks in the financial sector. This year, the Authority will take a closer look at the basic facts for investors in the Article 9 Funds to assess whether the strategies meet the requirements.
But Fager Wettergren does not believe that the risk of greenwashing is greater than in any other European country.
– We have no indication that there is more greenwashing in Sweden than in other countries. Given that it is marketed in the right way, I would not say that Sweden stands out.
Survival mechanism
Fager Wettergren instead pointed to the Swedish fund industry’s early adoption of sustainability policies as an explanation for its rapid embrace of the Article 8 label.
National legislation appeared in 2018 and meant that the fund industry had implemented sustainability disclosure before SFDR. Coins Ahlinder also noted that the Church of Sweden, which began investing sustainably at the turn of the century and excluded fossil fuels from its portfolios in 2008, inspired several institutions to exclude controversial sectors at an early stage.
“A majority of companies had a sustainability profile, or at least some type of screening, sustainability guidelines and exclusion policies even before SFDR came into force. This made it fairly easy to adopt the Article 8 label immediately,” said Ahlinder (pictured below).
The emphasis on sustainability is also reflected in the population as more than a third of Swedish savers have chosen a sustainable fund, according to a 2020 survey from the industry association Fondbolagens förening.
– As a fund company in Sweden, you will not survive if you do not have a sustainability mindset, says Per Haldén, investment manager at Swedish Navigera. – This may be why it is important for Swedish companies to classify their funds as at least Article 8 at an early stage, while it may not be as important on the continent.
He believes that the Article 8 gap may be due to caution on the continent rather than cockiness in Sweden.
– They are perhaps a little more hesitant to precede the forthcoming SFDR clarification on the continent than we are in Sweden. Many believe that it is risky to classify funds too highly before we have clear guidelines for what makes a fund Article 8 or 9, as it may be necessary to downgrade it at a later stage, says Haldén.