German regulator consults on greenwashing rules for ESG funds

Desiree Fixler, DWS’ ex- head of sustainability, says Bafin would be more effective if it tackled mis-selling and securities fraud

German financial regulator BaFin has launched a consultation on proposed guidelines for sustainable funds, in an effort to “protect investors from greenwashing”.

Thorsten Pötzsch, BaFin’s Executive Director in charge of securities supervision and asset management, said that “where it says ESG on the outside, there must also be sustainability on the inside”. 

Under the proposed guidelines, a fund would be considered sustainable if at least 75% of its assets were invested sustainably, it pursued a sustainable investment strategy such as best-in-class, or it tracked an ESG index. 

In order to be considered sustainable, an asset must make a “substantial” positive contribution to social and environmental goals. Nuclear energy, shale oil and oil sands are excluded, as are issuers with more than 10% of revenues from fossil fuel usage or energy generation, or 5% from coal or oil extraction.

Green bonds are included as sustainable assets, but the fund manager must specify under what standard they have been issued. 

Desiree Fixler, ex- Group Sustainability Officer at German asset manager DWS – formerly the investment arm of Deutsche Bank – told RI that, while any action which stopped firms from greenwashing was welcome, BaFin could better reduce the amount of greenwashing by bolstering its efforts on securities fraud and misrepresentation.

Fixler, who alleged in the Wall Street Journal this week that DWS exaggerated its ESG claims during her tenure, believes that, subject to a materiality test, greenwashing can be classified as securities fraud.

“Strengthen the oversight and enforcement of securities fraud,” she said. “When folks realise the regulator is switched on and watching with zero tolerance towards misrepresentation, there will be less greenwashing”.

“Sometimes when you have complex and detailed regulation, the bureaucrats and the gamers find it easier to box-tick and arbitrage.” 

The German investment fund association BVI said that the latest draft of the guidelines was a “noticeable improvement” on a version circulated in April, of which it was sharply critical. That version would have required 90% of a fund’s capital to be invested in eligible sustainable assets in order to qualify, while the latest draft sees that threshold fall to 75%.  

However, BVI said this is still too high, due to a lack of eligible investments. It warned that the quota could lead to sustainable funds instead being launched in Luxembourg, where no such rules apply, and that Germany would “suffer as a location for funds”.

The body pointed to discussions between the Ministry of Finance, Germany’s Sustainable Finance Committee, the BVI and other market participants, which are considering sustainability guidelines as a “better solution” to greenwashing than BaFin “going it alone”.

Angela McClellan, Executive Director at German sustainability network Forum Nachhaltige Geldanlagen, also levelled criticism at the proposed guidelines. 

“I share concerns that the Sustainable Finance Disclosure Regulation leaves too much room for interpretation with regard to product classification and therefore does not prevent greenwashing”, she said, referring to new EU requirements for investment funds to disclose information on their ESG objectives. “Nevertheless national initiatives that introduce new standards in addition to already existing and challenging EU regulations place additional burdens on market participants”.

The consultation closes on September 6.