German financial supervisor BaFin has issued clarifications on how it would view collaborative engagement efforts by investors, removing a major bar to coordination on sustainability issues in the market.

Investors have previously been reluctant to take part in collaborative engagements in Germany due to uncertainty over how BaFin might view their efforts. The regulator has now set out its thinking in response to a series of hypothetical situations presented to it by members of the German government’s sustainable finance advisory council.

According to BaFin, acting in concert occurs when parties “agree on the exercise of voting rights or cooperate in some other way with the aim of achieving a permanent and significant change in the issuer’s corporate direction”. However, this rule does not apply to agreements on an individual case or issue.

BaFin assessed the six situations it was given against these two tests.

The first situation envisaged a group of investors meeting to discuss an ESG issue and deciding to hold a meeting with company management on the topic. A second covered this group post-meeting, where they hold a discussion on escalation strategies at which voting against board members is discussed. In a third situation, a group of investors meet and decide to jointly sign a letter on an ESG topic to company management.

In BaFin’s opinion, investor actions in these situations do not constitute an agreement on voting rights. All three actions only relate to individual cases or topics rather than overall company direction and so do not fall foul of the law, the regulator said.

In another situation, an investor representative comments on an ESG issue at an AGM and mentions that other investors have this perspective. The investor mentions their own voting intention but there is no coordination of behaviour. A fifth situation would see investors agree to file a shareholder proposal as an engagement escalation, demanding a reduction in emissions.

In both these situations, BaFin indicated that it would not view investor actions as breaching rules. The regulator said the first situation does not involve a coordinated exercise of voting rights – and in any case, a single AGM represents an isolated case – while in the second situation, investors are only agreeing to a coordinated exercise of voting rights in relation to a specific resolution at a specific AGM.

The main area of uncertainty comes in the final situation considered, in which investors publish an open letter or press release to a company calling for changes. The group also discusses and formulates possible escalation methods via voting, but investors make individual decisions on this.

BaFin said that, even though investors make individual decisions, this would constitute an agreement on voting rights. While this is in itself an individual case, the regulator said, it may combine with other individual cases to fall foul of the law if investors are seeking a change in company direction.

While BaFin indicated that it would not take action in the majority of such situations, it warned that courts may take a different view.

The regulator also noted that it could only make assessments of “abstract case studies”, whereas reality is “significantly more complex”. It recommended that the actual changes sought by investors should always be considered when determining whether collaborative engagement is aimed at achieving a “significant and lasting change in company direction”.

Cutting the Gordian Knot

Tommy Piemonte, head of sustainable investment research at Germany’s Bank für Kirche und Caritas, said the clarifications remove a lot of legal uncertainty for investors in Germany.

“I hope that the Gordian Knot has now been cut and that we will see an increase in collaborative engagement in Germany in the next few years,” he continued. “Personally I hope that, with the BaFin publication, a major hurdle has also fallen for a German engagement platform as envisaged by the sustainable finance advisory council of the German government.”

The council, which is made up of independent representatives from industry, civil society and academia, is looking to make proposals for a collaborative engagement platform in Germany. Michael Schmidt, chair of its working group, said previously that the BaFin clarifications were a big prerequisite for actually forming the platform as investors needed “as much legal certainty as possible” before signing up to initiatives.