The president of German financial regulator BaFin has warned that current ESG fund disclosure requirements create a “flood of information” instead of providing investors with the quick overview they need.
In a speech last week at the launch of BaFin’s sustainable finance strategy, president Mark Branson said investors are overwhelmed by being given too much and too complex information. This makes it challenging to be able to clearly and quickly determine how sustainable a product is.
From current sustainable finance disclosures, he said investors can determine what strategy a product pursues and its proportion of sustainable investments. But investors need to be able to easily identify if a taxonomy-compliant product includes nuclear or gas, or whether a product only invests in green or transitioning firms, he added.
“We all know that not every ‘green’ is the same,” he said. “It’s much more complex. But this also means that products must be labelled to reflect this. The categories that we have in current regulation do not allow for that.”
Branson subsequently set out a series of three “sensible” fund categories. The first category would finance clearly climate-friendly activities, which are still in their early stages. These are often risky and higher cost, and have to balance higher impact with higher greenwashing risk.
The second category, which he said most current sustainable funds would fall into, would be “exclusions products”, which screen out activities or sectors. These funds do not have a high impact but are less risky and can be cheaply produced.
The third and highest impact category is transition products, which Branson says have a large potential market, manageable risks and a potentially high impact.
The third category would require “truly active management” to assess company transition plans and their implementation. Such products wouldn’t be cheap and would have an equally high greenwashing risk. It wouldn’t be sufficient, Branson said, to invest in firms with “nebulous” net-zero plans.
Explaining the comments further, a spokesperson for BaFin told Responsible Investor that the current “extensive” disclosure requirements lead to a flood of information as opposed to a quick overview for investors.
Branson was not making concrete regulatory proposals in his speech, but hopes to start a discussion on the topic, the spokesperson said, adding that BaFin will look to feed into discussions on the European level.
Supervisory blueprints
Looking to the strategy itself, BaFin explained how it planned to supervise the market for sustainable finance products, as well as the management of environment-related financial risks and climate risk data.
Among other actions, the regulator will look to monitor compliance with the SFDR and CSRD, as well as addressing management of physical and transition risk and disclosures on the topic under Solvency I and II.
The strategy reiterates that the regulator is not the environmental, ethical or social “police” and does not direct financial flows, saying this is up to politicians. As such, it will only look at transition plans from supervised firms from a risk perspective, and will “not go beyond [our] supervisory mandate”.
On the topic of climate risk, BaFin says supervised companies underestimating their transition or physical risks or not being transparent about their management practices can also be greenwashing.
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