SFDR Advice from German Regulator BaFin – Financial Services

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Key points to remember:

  • On September 5, 2022, the German Federal Financial Services Supervisory Authority (Bundesanstalt für FinanzdienstleistungsaufsichtBaFin) has published a Q&A providing guidance on interpreting certain aspects of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, “SFDR”).

  • This Q&A takes into consideration, and appears in part to deviate from, previous guidance issued by the European Commission in July 2021 and May 2022 regarding the interpretation of the term “promote” under Article 8 SFDR, disclosure of alignment of SFDR Article 8 fund taxonomy, and application of SFDR to legacy funds.

On September 5, 2022, the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) has published a Q&A document providing guidance on the interpretation of certain aspects of the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, “SFDR”). This Q&A document takes into consideration, and appears to partly deviate from, previous guidance issued by the European Commission in July 2021 and May 2022. It will form the basis of BaFin’s administrative practice with regard to the both German funds and European or non-European funds. funds marketed in Germany in the future.

BaFin plans to regularly update the list of questions and answers. The main aspects of the Q&A document are:

“Promote” under Article 8 of the SFDR. BaFin responds to the discussion within the industry on how to interpret the term “promote” which defines the scope of Article 8 SFDR. According to the BaFin, “promotion” within the meaning of Article 8 of the SFDR should not be understood as “advertising” but rather in the sense of “supporting” or “pursuing” environmental or social characteristics if they are so communicated to the investor.

Taxonomic alignment. BaFin confirms that, according to its understanding of the Commission’s response on taxonomic alignment, a financial market participant which offers a financial product referred to in Article 8 of the SFDR by promoting environmental characteristics but which does not is not committed to investing in environmentally sustainable economic activities is not obliged to assess taxonomy alignment or to collect (or do its best to collect) corresponding data. According to BaFin, financial market participants must disclose the actual degree of taxonomic alignment, which can be “zero”; such disclosure may be based on the fact that no data is collected. In other words, for financial products that do not invest in any environmentally sustainable economic activity, there should be no obligation to collect the corresponding data. BaFin sees no substantial risk of “greenwashing” in this regard.

Legacy Funds. With regard to old funds (i.e. funds which have not been marketed after 10 March 2021, the date of application of the SFDR), the Commission has previously confirmed that the periodic reporting of these funds must comply with Article 11 of the SFDR and that such funds must also comply with the rules relating to information provided on the environmental or social characteristics and sustainable investment objectives on websites in Article 10 SFDR. BaFin clarifies that, in its opinion, these obligations can only apply to former funds that have disclosed ESG information on a website, in contractual conditions, in pre-contractual information or in advertising materials during the period of commercialization if and to the extent that such sustainability-related disclosures made in the past satisfy the requirements of Section 8 or 9 SFDR, respectively. The question is whether this could mean that most of these legacy funds, if any, would meet the requirements of Article 8 but not Article 9 SFDR in light of the fact that the latter Article requires investing 100% in sustainable investments that exactly meet the requirements definition of Article 2 (17) SFDR, and legacy funds are unlikely to meet these requirements at a time when this definition was not yet known.

BaFin also clarifies that in its opinion, legacy funds are not required to make pre-contractual declarations under Articles 6 and 7 SFDR.

The Q&A document provides useful clarification on the application of SFDR. However, it is important to note that BaFin’s interpretation may be superseded by any conflicting guidance issued by the European Commission or the Joint Committee of European Supervisory Authorities.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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