BaFin publishes strategy for creating a sustainable financial industry

Recently, BaFin published its strategy for creating a sustainable finance industry ("Sustainable Finance Strategy"). With this initiative, BaFin intends to clarify its supervisory role in the area of sustainable finance. The aim is, as at EU level, to lead to the allocation of funds to the real economy in accordance with ESG criteria through disclosures of information and other transparency measures, thereby shaping a sustainable finance industry and combating climate change.

Sustainable financial products in the focus of investors and under BaFin supervision

In 2022, according to an overview of market data by the Federal Environment Agency: Finance of 23.06.2022, the financial sector again experienced record demand for sustainable financial products. It seems that the EU's Green Deal strategy is working and the adopted Disclosure Regulation (Regulation (EU) 2019/2088 "SFDR"), Taxonomy Regulation (Regulation (EU) 2020/852), Corporate Sustainability Reporting Directive (Directive (EU) 2022/2464 "CSRD") and a multitude of other standards are steering financial flows into sustainable products.

BaFin's main areas of action

The extent to which BaFin sees the future need for action respective to the financial service undertakings it supervises and which topics it (at least currently) considers essential for its supervisory practice is indicated in the now published Sustainable Finance Strategy.
BaFin has defined the following five key areas for action:

1. Risk-oriented and practical regulation
2. Reliable data on financial climate risks
3. Appropriate management of environment-related financial risks
4. Preventing and combating greenwashing, in particular through reliable information for investors
5. Generating and sharing knowledge in open dialogue

1. Risk-oriented and practicable regulation

Among other things, BaFin plans to use its high level of professional expertise in the capital market to assist the legislator and contribute to the practical further development of the regulatory framework. Through its involvement, BaFin would also like to create legal certainty in the interpretation of regulations.

This gives prospect for further publications by BaFin regarding its supervisory practice.

2. Reliable data on financial climate risks

BaFin notes that supervised entities can only effectively manage risks arising from a transition to a sustainable economy (so-called "transition risks") and physical risks in their own balance sheet or in their financial instruments or financial services if they have access to reliable data from entities in all sectors of the economy.

BaFin acknowledges that such an assessment is currently difficult due to the available information but holds out the prospect that the availability of information will change in the future, not least due to CSRD (and the European Sustainbility Reporting Standards - "ESRS" - which substantiate it) as well as SFDR and other specific disclosure obligations applicable to companies.

BaFin states that it would like to examine in a risk-oriented manner how the companies it supervises disclose their sustainability risks and provide information about their environmental risks. Furthermore, BaFin monitors the disclosure of the companies according to the CSRD (together with the ESRS that substantiate it) within the scope of the balance sheet control. BaFin is building up capacities in the enforcement department for the balance sheet control.

On the one hand, BaFin indicates here that its supervision is oriented towards the respective risk. However, it should not be concluded from this that a mere market monitoring/market analysis will take place first. The capacity build-up in the enforcement department speaks against this.

3. Appropriate management of environment-related financial risks

BaFin again states that it does not classify and assess financial climate risks as a new type of risk. Rather, financial climate risks affect the already established risk categories (e.g. credit, market, liquidity, operational, insurance or strategic risks).

BaFin concludes from this that the existing supervisory instruments can be used. Among other things, it encourages the companies it supervises to constantly work on the quality of the data and to use scenario analyses.

4. Preventing and combating greenwashing, in particular through reliable information for investors

As in the draft directive for sustainable investment funds published by BaFin (we reported here and here) and ultimately not pursued further (we reported here), BaFin pays particular attention to avoiding greenwashing.

In its Sustainable Finance Strategy, BaFin defines greenwashing as a practice in which sustainability-related information does not clearly and honestly reflect the sustainability profile of a company, a financial product or a financial service, so that customers can ultimately be misled.

BaFin notes that legal foundations for creating more transparency in the area of sustainability are in place at both product and company level in the form of the SFDR, CSRD and, in the future, the EU Green Bond Regulation.

BaFin sees its role with regard to the prevention of greenwashing on the one hand in monitoring whether the supervised company does not clearly and/or honestly disclose the sustainability profile and thus misleads investors. On the other hand, BaFin sees it as its duty to avoid underestimating transition and physical risks.

In order to prevent greenwashing, BaFin would like to examine compliance with the transparency and disclosure obligations with a focus on SFDR and Articles 5 to 7 of the Taxonomy Regulation, among other things, within the scope of product and market supervision. BaFin will also supervise MiFID II and the delegated acts based on it with regard to sustainability-relevant obligations in the context of conduct of business supervision.

The non-uniform definition of greenwashing is problematic. The mostly non-transparent sustainability profiles lead to investors not investing in the sustainable investments they want. In the interest of consumer protection, BaFin will therefore continue to actively participate in making the information more comprehensible for investors.

5. Generating and sharing knowledge in open dialogue

Due to the considerable complexity of sustainable finance, BaFin would like to emphasise its monitoring and reviewing role, as well as the limits of its mandate. However, it clearly emphasises the need to actively promote dialogue between experts and stakeholders.

This is to be welcomed, as despite (or perhaps because of) the enormous number of European regulations and delegated acts, as well as the constantly updated question and answer catalogues of the EU institutions, many points are/remain unclear.

Outlook

The BaFin makes it clear through the Sustainable Finance Strategy that it will play an important role in the defined areas of action in clarifying the handling of ESG criteria and thus attempts to eliminate uncertainties among supervised companies and investors. However, it also makes it clear that it demands compliance with disclosure obligations, which is demonstrated not least by the increase of capacities in the enforcement department.

With the kind support of Alexander Grünewald, (Intern) Bird & Bird Frankfurt am Main - Finance & Financial Regulation