Bankers Demand Clarity as Sweden Watchdog Balks at ESG Rules

In Sweden, where green bonds were pioneered, a warning from the financial regulator that it may not have the necessary tools to enforce new European Union sustainability rules has members of the financial industry voicing frustration and dismay.

In a consultation response to the Swedish finance ministry, the Financial Supervisory Authority said the EU’s new climate rules would place an unreasonable burden on the watchdog.

“The Swedish FSA is seen as a leading advocate for greening the entire financial system,” said Roger Josefsson, head of sustainability at Danske Bank in Sweden. But in their letter, “they self-professedly claim to lack the competence to assess sustainability risks of banks and financial institutions’ credit and investment portfolios.”

Bankers Demand Clarity as Sweden Watchdog Balks at ESG Rules

It’s the latest indication that the financial industry is struggling to adapt to regulatory changes that are about to revolutionize the way companies, banks and investors do business. The EU’s taxonomy is just one plank of a whole array of new rules that are still evolving, as Europe races ahead of the rest of the world in piecing together a new economic model it hopes will protect the planet from a climate disaster.

The Swedish FSA’s response, which is signed by Director General Erik Thedeen (who’s also chair of the International Organization of Securities Commissions’ task force on sustainable finance), is part of a national consultation process that is likely to inform Europe’s approach to building a complete framework for climate-friendly finance. The Stockholm-based FSA says it will need more resources if it’s to have a chance at coping with the new demands, but suggests even that may not be enough.

Meanwhile, Sweden’s government has suggested that it might set even tougher standards than those being proposed at the EU level. In a recent interview, Financial Markets Minister Asa Lindhagen, who represents the Green Party, said she may back stricter local rules given the “acute climate crisis that we are in.”

First Green Bond

The Swedish FSA’s response is striking as it shows that even in a market in which green bonds make up a vastly bigger proportion of the total than elsewhere and where the world’s first green bond was underwritten back in 2008, there’s plenty of confusion. Most complain of a lack of clarity, while others say there’s simply too much new data to digest.

Kristin Magnusson Bernard, the chief executive of Sweden’s AP1 pension fund, says “the rules of the game are what matter to us. So we are hoping on more clarity on policy and regulation, and we’ll be asking for it ahead of the UN summit, the COP26 this fall. Because once we have more clarity on the transition pathway and what’s going to be profitable over the long term, it’s much easier for us as investors to start channeling more capital in the right direction.”

Victor van Hoorn, executive director at Eurosif, the European Sustainable Investment Forum, said some regulators have started to “define thresholds or define a bit better what those different products are.” But given the lack of clarity from above, they’re “all likely to come up with different local answers.”

The upshot is that Europe risks “market fragmentation” due to the array of different interpretations, van Hoorn said. Ultimately, the lack of consensus means “there are going to be concerns around greenwashing,” he said. “There are going to be concerns on the more basic point about comparability between products.”

Sweden’s FSA says it’s currently “unclear” whether its “supervisory responsibilities should include reviewing the extent to which underlying investments meet the environmental requirements” set out in the EU’s new rules. If that’s the expectation, it would be “inappropriate,” because the regulator “does not have the competence for that type of supervision,” it said.

The Swedish FSA’s letter suggests that “even with ample funding, the necessary competence would be very hard to come by,” according to Josefsson. And within the financial industry, “we of course also see the need to tackle these issues head-on and as soon as possible. But according to what measure? What is the yard stick? As an industry we need politicians and regulators as well as academia to step up to the plate and tell us how to. In detail!”

Magnusson Bernard at AP1 says the next 5-10 years will be key, which means “we need clarity now.”

“For that you need a rule book in place,” she said. “Once it’s there the capital market can do whatever it’s supposed to do.”

©2021 Bloomberg L.P.

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