The president of BaFin has warned that regulation should not seek to answer the question of what is sustainable and that the German financial regulator should not be “the environmental, ethical or social police”.
Speaking at BaFin’s sustainable finance conference yesterday, Mark Branson said the conflating of political and scientific discourse over the taxonomy is “adding to the complexity of an already complex topic”.
While acknowledging that the idea behind the taxonomy was good, Branson said problems have arisen in its design. He stressed that it was “fundamentally the task of science” to define what is environmentally sustainable, whereas deciding what energy sources are required to achieve the low-carbon transition “is a decision for policymakers”.
Conflating the two risks adding to the complexity of the issue, he added, warning that controversial decisions in taxonomy design could result in investors being confused or even deceived by the regulation.
“We have learned one thing from the past few months,” he said. “A simple labelling of ‘green’ or ‘not green’ can barely do justice to the heterogenous and highly differentiated preferences of investors who want to invest sustainably… Regulation should not answer such questions for investors.”
In this context, Branson addressed the question of how supervisors can fulfil their mandate on sustainability. BaFin should not go beyond its mandate – the monitoring and regulation of financial market risks – by seeking to regulate preferences other than those contained in the taxonomy, he argued.
“We are in a certain manner the finance police, but certainly not the environment, ethical or social police. It is not up to us to decide which underlying technologies in financial products are sustainable. That is not our role and we lack the necessary expertise for it.”
What BaFin should be doing, Branson said, is creating transparency, which he described as “the be-all and end-all” of sustainability. “Only when there is transparency can investors make a conscious and well-informed decision.”
Lacking the necessary disclosures
BaFin has approved 167 funds that followed a sustainable investment strategy or tracked a sustainable index since August 2021. The volume of fund applications is slowly increasing, but Branson said applications for the regulator’s stricter fund category, where 75 percent of investments are taxonomy-aligned, are “somewhat rarer at the moment”.
This has been partly due to the fact asset managers are often lacking the required disclosures, but Branson said this is expected to improve when the Corporate Sustainability Reporting Directive comes in.
At the same time, he said BaFin was “often having to ask managers to describe their proposed investment strategies even more concretely”, to avoid labelling a product as green which “absolutely has not earned this adjective”, he added.
BaFin had been developing formal rules for fund labelling in the country, but dropped the plans in May due to the “dynamic regulatory, energy and geopolitical situation” and said it would simply apply the proposed rules internally.
Investors had broadly welcomed the idea of the guidelines but warned in August last year that 75 percent would be too high because there were too few eligible investments. German fund association BVI said that this could lead to funds being launched in Luxembourg instead.