Legal development

Targeting Greenwashing

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    • BaFin aims at Greenwashing
    • Public investment funds, which are eligible also for retail investors, can be qualified as "sustainable" where they:
      • primarily invest in sustainable assets
      • apply a sustainable investment strategy
      • replicate a sustainable index
    • Investments are primarily sustainable inter alia if they have strict investment restrictions, e.g. invest in at least 75 % sustainable assets and limits for direct or indirect investments in environmentally harmful assets.

    Since Germany rushed ahead of the rest of the EU with a national crypto-regulation in 2020, BaFin now prepares the ground for another solo action in the context of Greenwashing and presents its Draft Guidelines for Sustainable Investment Funds (BaFin Consultation 13/2021 dated 2 August 2021). The consultation will be closed for comments on 6 September 2021.

    The Draft Guidelines apply only to public (retail) funds, while special funds for institutional investors remain subject to the European requirements for sustainability (only) for the time being – however, time will tell if and how BaFin will adjust its regulatory administrative practice regarding special funds accordingly.

    Preventing "Greenwashing" is the primary aim of the Draft Guidelines. BaFin defines this as offering and distributing or marketing funds labelled as "sustainable" although those funds' assets are not or only very little assembled under consideration of sustainability aspects.

    It is welcomed that the current Draft Guidelines contain significant mitigations compared to a previously circulated version (e.g. the prior version contained a minimum proportion of 90 % sustainable assets). Insofar, the complaints of for example local fund associations have been heard to some extent.

    BaFin clarifies that the obligations of the SFDR (Sustainable Finance Disclosure Regulation (EU) 2019/2088) and the Taxonomy Regulation ((EU) 2020/852) remain unaffected and are only supplemented. BaFin will amend its Guidelines in case of European measures entering into force. BaFin clarifies that, in the Draft Guidelines, it follows the Taxonomy Regulation with regard to sustainability criteria.

    The Draft Guidelines shall apply to all public funds which either have a particular reference to sustainability in their name or are being distributed and marketed as primarily and explicitly sustainable.

    BaFin straightens out that compliance with the transparency requirements of the SFDR alone is not sufficient for a fund to qualify as sustainable or to being distributed explicitly as sustainable.

    Instead, a public fund can only qualify as a sustainable investment fund, if it is compliant with one of the following three variations:

    • Investment in sustainable assets;
    • Sustainable investment strategy;
    • Replication of a sustainable index.

    An investment fund which primarily invests in sustainable assets shall only be regarded as sustainable if its investment restrictions do explicitly require that a minimum of at least 75 % of the investments of the fund are invested in sustainable assets. BaFin refers to Art. 2 no. 17 SFDR for a definition of sustainable assets and demands that certain minimum thresholds (e.g. minimum proportion of revenue generated from renewables) and certain elimination criteria (e.g. no acquisition of fossil fuel electricity suppliers) are taken into consideration.

    Private Equity Funds and other public funds investing in financial instruments must comply with additional requirements. They have to implement in their investment conditions that on level of issuers or portfolio-companies.

    • a material contribution to the environmental and social objectives of the SFDR/Taxonomy Regulation is made;
    •  the governance requirements of Art. 2 no. 17 SFDR are realized; and
    • no significant harm is done to the environmental and social objectives of the SFDR/Taxonomy Regulation.

    With respect to the latter, BaFin provides explicit thresholds which automatically lead to the consequence that an investment and the corresponding fund do no longer qualify as sustainable. On issuer level or portfolio-company level the revenue must not be generated from:

    • more than 10 % energy production or other utilization of fossil fuels or nuclear power, whereas gas is excluded;
    • more than 5 % mining of charcoal or mineral oil;
    • extension, exploration or services regarding oil sand and oil shale.

    It is worth to mention that BaFin puts fossil energy and nuclear energy on the same level, while gas is privileged without further explaining this.

    Real Estate and other alternative funds investing in physical assets shall ensure in their investment conditions that on asset level a material contribution to the environmental and social objectives of the SFDR/Taxonomy Regulation is made, whilst at the same time none of these objectives shall be significantly harmed.

    This principle shall be applied also to funds which have a sustainable investment strategy without fixed investment restrictions and to funds which replicate a sustainable index. These funds can then be qualified as sustainable funds as well.

    Finally, BaFin provides some negative examples which do not comply with the requirements contained in the Draft Guidelines. A wording like "The special funds (Sondervermögen) is composed of debt chosen on the basis of aspects of sustainability in a proportion of 75 %" is considered as too broad.

    The Draft Guidelines as a BaFin solo leave several questions unanswered and are seen critically by the asset management sector: In particular, there is a risk that the Draft Guidelines, if applied without changes, could negatively impact Germany as a fund location; unless other EU/EEA Member States implement similar restrictions at the national level and do not wait for a harmonised proceeding throughout the EU.

    Authors: Dr Detmar Loff, Partner, Dr Conrad Ruppel, Partner, Dr Tobias Bauerfeind, LL.M. (Oxf.Brookes), Ilka Breuer and Dr Cornelius Hille

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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