The Danish Financial Supervisory Authority (FSA) is homing in on ‘greenwashing’ – false marketing of products as sustainable – and other potential financial risks facing pension funds in relation to climate change, in two separate notices aimed at the sector.
In its annual Christmas letter to lateral or labour-market pension funds, ATP, LD and life insurance firms, the regulator said it was requiring the addressees to report on their handling of financial risk during the green transition by 1 July 2020.
In the letter, the Danish FSA wrote: “Some of these risks can be observed already, others may crystallise over longer horizons.”
Financial risks arising from climate change could be physical – such as extreme weather damaging property – or transitional, for example changed regulation affecting the market value of investments, it said.
Noting the European Commission’s 10-point action plan to follow up on the United Nations’ sustainable development goals, the FSA told the pension and insurance sector that this work, which European authorities including the European Insurance Regulatory Authority (EIOPA) were working to complete, would also have an impact on Danish lateral pension funds and life insurance firms.
The FSA said it was focusing the letter on the financial risks arising from climate change and the transition to a sustainable economy. “Together, these risks can potentially affect the companies’ own business models and the value of their assets,” it said.
The authority expects pension firms to continuously consider possible quantitative and qualitative tools for measuring exposures to all significant risks, with measurements being updated on an ongoing basis.
New regulation on sustainable investment
In the long term, the FSA intends to develop a new piece of regulation on disclosure of sustainable investment and sustainability risk information, which is expected to take effect in early 2021.
Simultaneously, the watchdog released a regulatory note for the whole of the financial sector on climate change and sustainable development, in which it warned that the current level of demand for sustainable financial products could lead to some that were not all they seemed.
“Consumers and investors can be key players in the transition to a sustainable society,” it said in the note, adding that this required them to have access to sustainable financial products and services.
While the market was in transition, the FSA said there could be difficulties building a well-functioning market for green mortgage bonds, for example, if there was not enough real estate to meet future climate requirements, or more generally if there were a lack of investable sustainable products.
“This entails a risk of greenwashing,” it said, adding that wrong information about this would weaken confidence in this market.
“EU legislation is underway to address this, but in the meantime, it is important that financial companies make efforts to ensure that their products and services are in fact sustainable and/or climate friendly if marketed as such,” it said.