The Swedish Investment Fund Association (SIFA) appreciates the opportunity to give its comments to the Nordic Swan Ecolabelled Investment Funds initiative. SIFA has acknowledged that a number of labels and certifications has evolved around fund management which makes it hard for consumers to know how to make informed choices. It is important that this initiative provide further clarity and consumer benefits.
General comments
Unlike other products labelled with the Swan, funds only have an indirect effect on the environment or on other social issues. That makes the connection between the label and actual environmental benefits harder to explain. SIFA would urge Nordic Ecolabelling to clearly explain the reasons for the Swan label and how the label can benefit environmental change together with an explanation of the limitations of the label. There is a risk that consumers see the label as a guarantee for environmental impact, as with other labeled products and services. The suggested disclaimer do not provide consumers with the necessary explanation about the actual limited effects on the environment of investments into a Swan labelled fund.
SIFA has concluded that the criteria as it has been presented will make it possible for only very few funds on the Nordic market to apply for the Swan label. Many of the criteria are such that no funds today fulfil them. There are also questions around the reasons for including some criteria and not others. SIFA will further explain these comments below.
Among the general comments that SIFA would like to provide are that almost all the score points are focused on governance (G) and not on environment (E). One of the important features of the label must be that it is relevant for environmental impact. Therefore more focus on E is necessary if the label is to gain the necessary trust from consumers and media. SIFA suggests that the inclusion section is further developed and gives more score points than suggested in the proposal. As it is now the eco label is very oriented towards thematic active funds and it seems like accounting for poor investments give more score points than including strong investments from an environmental perspective.
The proposal contains no references to the cost of obtaining the label. In a presentation by Nordic Ecolabelling an application fee of 3000 Euro per fund was mentioned together with an annual license fee of 15 Euro/million assets under management (AUM). SIFA considers these numbers high and questions the credibility of a label where the fund managers might be suggested to have bought their labelling. All costs will ultimately be borne by the end investors and the attractiveness of the product depends on the cost in relation to the return.
SIFA would highly recommend a set fee instead of a fee related to the AUM. The costs of Nordic Ecolabelling to maintain the label do not increase with the AUM of the labelled funds. It is also unclear what is included into these fees. SIFA assumes that the controls performed by Nordic Ecolabelling , or other certified control agencies, to ascertain that the criteria are met are included in the fees.
SIFA would also as a general comment highlight that updating the criteria should happen no more frequent than once every fourth or fifth year to allow necessary adjustments to fund rules and IT systems.
Detailed comments to the criteria
01- Description of the fund
Only UCITS funds are eligible to obtain the Nordic Swan Ecolabelling. According to the criteria the fund must provide documents showing compliance with UCITS regulations. SIFA understands this as documentation showing that the fund has been authorized to perform UCITS services. SIFA shares the view that the starting point for the Nordic Swan Ecolabelling should be that only UCITS funds are eligible but would like to point out that there are special funds (specialfonder) on the Swedish market that are very similar to UCITS products and that as a second step might be suitable for a Nordic Swan Ecolabelling.
03 – Indirect holdings
The Nordic Swan Ecolabelling requires that a labelled fund must never have a direct holding of any company with more than 5% of its revenue from any of the excluded businesses. SIFA shares the opinion that a 5 % limit is reasonable as opposed to a zero limit. The conclusion of the Ethical board for fund marketing (ENF) is that a zero limit is not practically feasible.
However, the Nordic Swan Ecolabelleing requirement is that the contribution from each excluded area must be combined and if they together reach more than 5 % of the revenue the company must be excluded. This requirement goes further than the Swedish Ethics Board for fund marketing statement where the 5 % threshold is calculated for each individual area of exclusion criteria separately. The reason for the threshold is to allow investments into companies where it is difficult to promise a zero limit. 5% for each holding (or the group where a holding is a part) has been considered a relevant threshold and is used by the fund companies. SIFA suggests that the criteria follows the ENF statement.
SIFA has some trouble understanding the definition of indirect holdings and would recommend that it is further developed. It is important to explain what should be included when calculating the 5 % threshold and to define when it is not necessary to look through the underlying holdings. Investment companies are mentioned and SIFA would like to point out that it is almost impossible to fully see through the holdings of investment companies held by the fund.
Exclusion criteria
04 – New information on holdings
The practical effect of the statement by ENF is that funds that cannot uphold the threshold are not allowed to market themselves as excluding the relevant practice or product, such a fund cannot market itself as “fossil free” for example.
It is SIFA:s conclusion that a fund that receives information that an obligatory exclusion requirement is not met, but still keeps the holding during 24 months because the issue is expected to be resolved can keep its Nordic Swan Ecolabelling but not market itself as for example fossil free.
05-06- Extracting and refining fossil fuels and generating power
The criteria is very strict and very few funds on the Nordic market will be able to fulfil this criteria. However, SIFA welcomes the opportunity to make exceptions, especially power generating companies are considered possible to influence through dialogue and voting.
07 - 08 – Controversial weapons and conventional weapons
SIFA shares the view that controversial weapons is not compatible with the sustainable development goals and should not form a part of a labelled fund. Companies producing or gaining revenue from conventional weapons are common in funds on the Nordic fund market and excluding these companies will make the label unobtainable for many funds.
09 – Tobacco
Together with pornography, gambling, and alcohol, tobacco is one of the products that consumers expects an ESG fund to exclude. SIFA questions the logic of excluding one of these products and not the others. The environmental relevance of these criteria should also be further explained. Production of tobacco or other excluded products is rather easy to get information about. However, exclusion of distribution and sales of products like tobacco and other possible products are much harder to fulfil since the information is not provided by retail companies.
10 – GMO cops
Nordic Ecolabelling has motivated the decision to exclude GMO crops with biodiversity concerns and the precautionary principle. Very few funds on the Nordic market maintains exclusion criteria for GMO crops. There are screening consultants that provide screening for this criteria but it is costly. SIFA questions the logic of excluding GMO crops while other criteria with a more obvious environmental relevance, such as harmful chemicals or water supply, are not excluded. SIFA is of the opinion that GMO crops should not be among the exclusion criteria. One alternative could be to have a transparency clause where the fund manager should provide the information on its policy regarding GMO and social criteria.
11 – International norms and conventions
Exclusion of companies that violate international norms and conventions is a relevant criteria. The difficulty is to decide what actions constitute a violation. Does the criteria only relate to “confirmed” violations, and in that case, who “confirms” the violation and how? Would it be acceptable to keep a company with a violation while engaging for positive change? Different screening consultancies provide different answers to these questions which means that a fund company using one consultant might be eligible for the label when a fund company that uses another consultant is not even though they invest in the same companies. This is something Nordic Ecolabelling must take into consideration when designing the criteria.
12 – 13 - Government bonds, sanctions and corruption
Reflections on these criteria are that the Paris Agreement has not come into force so far. The new government in the US has signaled that the agreement might not be fulfilled. That would mean that investments into US bonds would be excluded.
The Transparency International´s Corruption Perceptions index is a relevant indicator for corruption but SIFA questions why the level is set at 70. There are countries below this level such as China and India that are currently issuing green bonds which will be important instruments to halt climate change. Investing in such bonds could have actual impact on the environment. Again, the environmental relevance of the criteria must be explained. At this “social level” there are other factors that are at least relevant, for instance human rights violations.
Inclusion criteria
14 – ESG analysis
According to the criteria only 90 % of the portfolio must have undergone ESG analysis even though an ESG fund would normally analyze the whole portfolio. However, for emerging markets or frontier market funds a 90 % is still a high number since service providers of ESG research have limited coverage of these markets.
P 1 - SIFA acknowledge that it might be difficult to analyze all holdings of all funds and is content to note that point score is given if the whole portfolio is analyzed.
15 – Inclusion
SIFA questions why only 50 % of the fund must be invested in holdings with strong ESG practices. Environmental relevance would suggest a higher percentage. It is also unclear what is considered “strong” ESG practices respectively “poor” ESG practices. As SIFA understands it this distinction is left to the fund manager but even so, a dedicated ESG fund would aim for a much higher percentage of strong ESG investments.
P 2 - Regarding the renewable energy and other green investments point score SIFA would suggest including more investments than the ones mentioned. For example clean tech and clean water are themes often connected with green investments.
P 3 – In connection with point score 3 SIFA would like to highlight the difficulty to see through the investments of investment companies.
Transparency and fund management
16 – ESG reporting and transparency
The labelled funds are required to report on a fund level which will mean unnecessary administrative costs since ESG activities, such as dialogues and voting, are performed the same way by the fund manager for all the funds. Relevant ESG issues are normally the same for all funds of the fund manager. SIFA would suggest that the reporting requirements are kept on fund management company level.
17- ESG related questions
SIFA has a hard time understanding the requirement that replies should be sent within two weeks. Fund managers work on behalf of their unit holders and replying to their questions is part of their business. Therefore the requirement is unnecessary and should be taken out.
18 – Reporting of the fund’s holdings.
Fund managers report their holdings to the financial supervisory authority on a quarterly basis. However, SIFA would suggest that reporting on its own website is required no more frequent than on a half yearly basis. If Nordic Ecolabelling needs to check the holdings more frequently they can find the holdings on the website of the supervisory authority.
P6 – Regular voting
Voting for a good, strong board that will be equipped to strategically address environmental issues in the operation is an indirect positive effect on the environment even though environmental issues are not often on the agenda but more points should be given if the voting can be justified with ESG issues in line with the policy of the fund. There is no environmental relevance if voting is just a tick the box exercise, there has to be relevant content in the voting as well.
It is unclear how the percentages are calculated, are they calculated on AUM or on holdings? SIFA also believes that the numbers are far too high, especially for global or index funds and would prefer more flexible voting criteria. The points attributed to this criteria seems very high and creates an irrelevant obstacle for fixed income funds.
P7 – Company dialogue
Company dialogues are often referred to as the main instrument for fund managers to provide real impact. Therefore dialogues should render a higher score than suggested by the proposal. However, Nordic Ecolabelling must define what is meant with “poor” ESG practices.
Quality and regulatory requirements
23 – Annual compliance check
It should be noted that the compliance check can also be outsourced.
25 – Information about the Nordic Swan Ecolabel
As has been mentioned above the disclaimer is far too short to provide investors with the necessary understanding of the limitations of the label. A more developed disclaimer will require more space and cannot be included in every marketing material. SIFA would like to highlight that the Swedish Investment Fund Association´s Guidelines for marketing and information for fund management companies already requires fund managers to include a comprehensive risk alert in all marketing material. Including the suggested disclaimer everywhere as well would therefore not be feasible. SIFA suggests that a reference to a web page where the disclaimer is accessible would solve this problem.
Swedish Investment Fund Association
Fredrik Nordström
CEO