In the financial industry and in the field of financial market regulation, there is no avoiding sustainable finance any more. A milestone was achieved in August this year, as financial advisers have since been required to ask their clients about their sustainability preferences. But what is a sustainable financial service?

There is no simple answer to this question. This is why we should first be clear about who is in the best position to answer specific questions. Generally speaking, defining environmental sustainability is a task for scientists. But deciding which sources of energy we need until we have made the transition to a low-carbon economy is a matter for politicians.

At the European level, the Taxonomy Regulation offers one answer. The idea behind the Regulation is good and hugely important – but the specific details were shaped not only by science but by political considerations, too. This has increased the complexity of an issue that was already complex to begin with. We are running the risk of confusing or even disappointing investors.

We have come to the conclusion that a simple “green” or “not green” label can hardly satisfy the individual heterogeneous preferences of investors. For example, some people consider nuclear energy to be sustainable, while others think it is not sustainable at all – even though nuclear power is included in the EU taxonomy for sustainable activities.

As supervisors, we cannot overstep our mandate to monitor and regulate financial market risks. We are not responsible for deciding whether the technology underlying investments is to be categorised as sustainable. This is not our role and we do not have the necessary expertise for this. What we can do is create transparency – and, in doing so, we can empower consumers. For example, consumers should be able to tell whether a product is based on companies that are already “green” or that are shaping the transition to a green economy. They should also be able to tell whether companies operating in the nuclear or gas industries are included.

Investors can make conscious and well-informed decisions about investment products only if they know what the content and the purpose of these products are. This also means that the product in question must be labelled appropriately in order to reflect –at least to some degree – the complexity of the issue. We are therefore calling for investor responsibility to be respected and promoted – by providing the necessary amount of transparency. This year, we intensified our supervisory practice in this direction.

BaFin checks and verifies whether this is observed in practice. Over the last 12 months, BaFin approved 167 retail investment funds as sustainable investments – and this trend is on the rise. All of these funds were required to fulfil our new transparency standards and rules regarding the sustainability of the investment products they offer. In this way, we are working to tackle greenwashing.

Adding a simple label to a complex product can result in the product’s content falling short of what investors expect. The idea that a simple label alone can make the world a better place may be tempting. But from a supervisory perspective, transparency, clear standards regarding the minimum amount of sustainable assets in a specific product and a market-driven selection of different types of sustainable financial products are a better way to accommodate investor preferences.