Ms Roegele, sustainability is currently a key focus in European legislation (see info box). How does BaFin view the developments that have so far been seen at the European level, in particular with regard to investment law, and how is BaFin involved in shaping these developments?

As a matter of principle, BaFin supports and advocates the inclusion of sustainability factors in the EU regulations on supervision. We expect the effects of a practicable European taxonomy in particular to be positive. It should be noted that sustainable finance is not limited to green investments, but also incorporates social factors such as the fight against child labour, as well as basic principles of corporate governance. The EU’s legislative package uses the terms “environmental”, “social” and “governance” in this context, which are often referred to as “ESG criteria”.

Furthermore, the regulations contained in the European Commission legislative proposals³ regarding increased transparency requirements may help investors to find out about the sustainability of financial products and thus base their investment decisions on this information. One of the objectives of the transparency requirements is that asset management companies should report how they take sustainability risks into account in the investment process. They should furthermore provide specific information in the distribution of sustainable financial investments. More stringent transparency and disclosure requirements should above all relate to financial products that are explicitly labelled as sustainable, such as sustainable investment funds. If disclosure requirements are too extensive, they could deter smaller providers from distributing sustainable products.

As regards investment supervision, BaFin primarily contributes, within ESMA, to the authority’s proposals for implementing sustainability factors into the UCITS Directive⁴ and the AIFM Directive⁵, and to the corresponding Delegated Acts.

This concerns provisions regarding organisational requirements, requirements for business operations and regarding risk management. In my view, ESMA has adopted the right approach with its proposals of December 2018. In particular the principles-based approach ensures that the principle of proportionality is taken into account. As supervisors, we will have to take the size and performance of asset management companies and the amount of the assets they manage into account when defining supervisory requirements in future. Furthermore, we must not forget that sustainable financial products represent a relatively young and innovative market. A principles-based approach leaves room for flexibility in the adjustment of risk models by the supervised companies, which would allow for future developments to be taken into account. This is all the more important since a taxonomy for identifying sustainable investments has not yet been finalised.

The proposals included in the legislative package of the European Commission as part of its action plan for sustainable finance also relate to the conduct of business and organisational requirements under MiFID II.⁶ What does that mean for investment firms?

The Commission’s proposals aim to establish a consistent definition of sustainability and to increase sustainable investments. The proposals include, for example, the integration of ESG criteria into the identification of target markets and into the suitability assessment. For product manufacturers and distribution companies, this means that they will in future be required to incorporate ESG criteria in the identification of target markets and in product classification and will also, among other things, have to classify financial instruments according to whether they promote these factors. Furthermore, when providing investment advice, investment firms will have to ask clients whether ESG criteria matter to them in their financial investments and take this into account in the investment strategy and recommendation. At the end of 2018, ESMA published a consultation paper on these new requirements, giving market participants the opportunity to state their opinions. These opinions are currently being evaluated.⁷

What changes does the legislative package bring for clients, and what is BaFin’s position?

Firms are already required to take the criteria specified by clients into account in their investment advice. If clients value the environmental sustainability of their investments then this has to be taken into consideration in the investment recommendation even under current legislation. Transparency is important since it allows clients to compare options. Clients need to be able to distinguish between investments that are genuinely sustainable and those that are merely presented as such.

As a matter of principle, BaFin supports the European Commission’s plan to promote sustainable investment. In all likelihood, more and more companies will offer sustainable financial instruments as a result of the Commission's legislative proposals. The topic of sustainability is on everyone's mind right now, meaning demand is likely to rise.

However, one thing must not be forgotten: the aim of the product governance and the suitability assessment requirements is to ensure that clients purchase products that are suited to them. And that will not change. The sustainability of an investment can therefore only ever be one part of a client’s investment decision. If ESG criteria are not the client’s top priority, then firms must equally take that into account in their investment recommendations.

It is important that we establish a common understanding of “sustainable investment” and that clients are able to invest sustainably if they wish to do so.

Prospectuses are an important source of information for investors. Should prospectuses provide investors with more information about the sustainability of their investments?

The EU Commission does have such aims, and BaFin supports this approach as a matter of principle. The Commission is, e.g., proposing a regulation that would, among other things, oblige asset management companies to disclose their attitude towards sustainability risks in the prospectus.⁸ The Commission’s 2018 action plan for financing sustainable growth provides for the mandatory inclusion of particular minimum information requirements in securities prospectuses for green bonds. Of course, we must guard against introducing disproportionately strict rules for issuers of sustainable financial products. It would not be acceptable for them to be required to meet more stringent information obligations than issuers of conventional bonds. This would make issuing green bonds unattractive, which is precisely the opposite of what we hope to achieve. In BaFin’s view, we need to find a balanced approach that meets investors’ information needs without placing an excessive burden on issuers in the form of additional obligations.

Should rating agencies be required to place a greater emphasis on sustainability criteria in their ratings?

Current legislation already requires that rating agencies consider all factors relevant to the assessment of the creditworthiness of a company or a financial instrument. This of course includes ESG factors. This requirement is contained in the current version of the EU Credit Rating Regulation.⁹ If sustainability criteria that are not relevant to creditworthiness were to be weighted more heavily in the assessment of credit risk, errors in the analyses and therefore misallocation in the market could result. BaFin therefore does not support such an approach.

There are other means of achieving transparency for private and institutional investors with regard to the sustainability of corporate decisions and financial instruments, namely special ESG ratings. These are already used. However, what is missing are common standards for such ratings. The question is whether the industry should be left to regulate itself using its own standards, or whether legislation is required. This is an issue that should be discussed at the European level.

Ms Roegele, thank you for your time.

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