Regulatory Body BaFin Plans Outline for Investments Tied to Sustainability
The Federal Financial Supervisory Authority (BaFin) in Germany has published a draft directive aimed at enhancing the risk management and disclosure duties for sustainable-oriented investment funds. The new directive, which aligns with EU standards on transparency and sustainability risk integration, seeks to establish proportional, differentiated ESG risk management rules for institutions based on size and risk exposure.
The draft directive extends but does not fundamentally diverge from broader EU sustainable finance rules. It focuses on robust, expert valuation of sustainability risks, such as in real estate, and transparent governance aligned with the Sustainable Finance Disclosure Regulation (SFDR) and the European Securities and Markets Authority (ESMA) guidance.
Smaller firms may apply simplified ESG risk assessments focused on the most material risk positions instead of a one-size-fits-all approach, exemplifying the proportionality principle. This approach is a departure from existing European provisions, where smaller entities may face potentially more burdensome standalone ESG processes.
Investment funds can only be marketed as sustainable if they maintain a minimum investment quota in sustainable assets (75%), pursue a sustainable investment strategy, or track a sustainable index. Upper limits apply to sustainable assets, with a maximum of 10% coming from the generation of energy or the other use of fossil fuels.
The German Fund Association (BVI) views the reduction of the minimum quota for investments in sustainable assets from 90 to 75 percent as insufficient, citing a lack of suitable investments in practice. Despite this concern, the BVI sees the latest BaFin draft as an improvement over the pre-version from April.
One of the most significant improvements, according to the BVI, is the elimination of unrealistic requirements for the construction and operation of real estate. However, the BVI expresses concern that BaFin's moves may do a disservice to the strategy of the federal government to make Germany the leading location for sustainable financial products.
The draft directive outlines provisions for the future structure of public funds labeled as sustainable or marketed as explicitly sustainable. The fund industry has until September 6, 2021, to comment on the plans of the financial supervisory authority. BaFin is closely following and supporting ongoing work on sustainability at the national and international levels, including the traffic light system of the German Sustainable Finance Strategy and the recommendations on sustainability-related practices by the International Organization of Securities Commissions (IOSCO).
The aim of the directive is to protect investors from potential greenwashing. Alternatively, a sustainable investment fund can be created through the replication of a sustainable index, or by pursuing a sustainable investment strategy such as a best-in-class approach. BaFin only approves the investment conditions of investment funds if they comply with legal requirements. Sustainable assets must make a significant contribution to achieving environmental or social goals.
- The draft directive, issued by BaFin, focuses on the insurance and finance business sectors, particularly for sustainable-oriented investment funds, aiming to establish ESG risk management rules that align with EU standards.
- The German Fund Association (BVI) emphasizes the importance of finance in the business sector, pointing out that the reduction of the minimum quota for investments in sustainable assets from 90 to 75 percent might be insufficient, as it could hinder the growth of sustainable financial products in Germany.
