BaFin has launched a public consultation for its Guidelines on sustainability-oriented investment funds. The guidelines set out requirements that asset management companies will be obliged to meet in future when setting up retail investment funds labelled as sustainable or marketed explicitly as sustainable.

Under these requirements, funds may only be marketed with the “sustainable” label if the fund rules provide either for compliance with a minimum investment ratio in sustainable assets or adherence to a sustainable investment strategy or require that the fund tracks a sustainable index. The fund industry has until 6 September to comment on the plans.

Fund rules often too general

The need for the guidelines is due to the fact that the issue of sustainability has become tremendously important in the fund industry in recent years. The number of funds with labelling that includes the word “sustainability” continues to rise.

Nevertheless, BaFin has noted that the fund rules of investment funds are sometimes only very general in addressing issues of sustainability. As a result, fund managers have a great deal of flexibility when choosing assets for the funds’ portfolios, even in the case of investment funds labelled “sustainable”. “This opens the door to false labelling”, says BaFin Chief Executive Director Dr Thorsten Pötzsch, who recently took over BaFin’s Securities Supervision/Asset Management Sector.

Pötzsch: “A fund that uses the ESG label must deliver on its promise of sustainability”

The planned guidelines aim to ensure that providers of funds flagged as sustainable have fund rules that express their commitment to a sustainable investment approach – in terms that are clear and as specific as possible. The objective is to effectively protect investors from greenwashing. “A fund that uses the ESG label must deliver on its promise of sustainability”, Pötzsch explains. But this will also benefit the fund industry itself, he says, adding that “when it comes to sustainable investment funds, a high level of supervision is an indication of quality that investors will consider when making their investment decision.”

Minimum investment ratio of 75%

The minimum investment ratio in sustainable assets set out in the guidelines is 75 percent. These assets must contribute substantially to achieving environmental or social goals. Maximum limits will also apply, such as a maximum of ten percent on energy generation from fossil fuels or fossil fuels used in other ways.

Alternatively, funds may also pursue a sustainable investment strategy, for instance using a best-in-class approach. In this case, assets offering the best prospects from a sustainability perspective are chosen from an investment universe or given a stronger weighting in the portfolio. Finally, a sustainable investment fund can also be designed to track a sustainable index.

National and international activities on sustainability

Apart from its own efforts, BaFin closely monitors and supports the ongoing work on the topic of sustainability at the national and international level. This work includes the sustainability “traffic light” labels of the German Sustainable Finance Strategy and the consultation report of the International Organization of Securities Commissions (IOSCO) on the Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure.

The BaFin Guidelines now submitted for public consultation supplement the existing European rules. The EU Disclosure and Taxonomy Regulations specify the disclosure requirements that asset management companies must fulfil at the company and product level but do not define how the fund rules of an investment fund must be structured (see expert article on the BaFin website).