German regulator shelves sustainable fund guidelines due to ‘dynamic geopolitical situation’

BaFin's president says the regulator’s job is to ensure sustainability risks are managed, not 'pursue environmental policy objectives'.

German financial regulator BaFin has announced it will shelve long-awaited guidelines for sustainable funds due to “the dynamic regulatory, energy and geopolitical situation”.

Speaking at a press conference in Frankfurt on Tuesday, BaFin president Mark Branson said the current situation “is not sufficiently stable for permanent regulation”. Instead of issuing guidelines, the regulator will apply principles from the initial consultation in its work, requiring sustainable funds to invest at least 75 percent of their assets in sustainable investments, follow a sustainable investment strategy with at least 75 percent of assets or track a sustainable index. Through these stricter examination practices, fund investors will be protected from greenwashing, Branson said.

German investors had broadly welcomed the idea of sustainable fund guidelines when BaFin launched its consultation in August, but raised concerns that the 75 percent quota was too high and there were not enough eligible investments. The threshold in the consultation had already been cut from the 90 percent proposed in a draft version of the guidelines circulated in April last year, based on market feedback.

Silke Stremlau, director at pension fund Hanoversche Kassen, said she didn’t believe that the war in Ukraine was behind BaFin ditching the guidelines. “Instead, I believe that the reason for not enacting them lies in the fact that a separate German directive is not really compatible with EU legislation, in particular the taxonomy,” she said. “The new BaFin leadership realised this, but was perhaps not courageous enough to throw the entire guidelines in the bin.”

Investors also raised concerns last year that, while the EU’s sustainable finance disclosure regulation left “too much room for interpretation with regard to product classification”, in the words of the head of German sustainable finance organisation FNG, a proliferation of local standards could lead to fragmentation and would place additional burdens on market participants.

Magdalena Kuper, head of sustainability at the German Fund Association, said on LinkedIn that this was “the worst of all solutions” for the fund industry. BaFin’s decision, she said, robbed it of the opportunity to take industry feedback into account and would drive fund companies and asset managers away to Luxembourg.

While Tuesday’s announcement spells the end of BaFin’s efforts to create sustainable fund-labelling guidelines, there may be movements in the political sphere. A major report put out by a government-sponsored sustainable finance council last year recommended a five-point sustainability rating system for funds, which was translated into a traffic light system in the government’s subsequent sustainable finance strategy.

Stremlau, who was vice-chair of the committee, said that they had not heard anything new from the finance ministry on the traffic light system but that the committee, whose membership is in the process of being refreshed, would push it forward.

Branson also added that BaFin’s job was not to pursue environmental policy objectives, which he said was in the realm of politics, but to ensure that businesses are managing sustainability risks. He highlighted the example of stranded assets on bank balance sheets or in insurance portfolios.

Branson said that the regulator was also looking to protect consumers by stopping misleading marketing. The regulator has already launched one investigation into DWS for exaggerating its ESG capabilities – which the asset manager denies – and mentioned protecting consumers by combating misleading marketing in its medium-term strategy last November.