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German Regulator Combats Greenwashing by Proposing Guidelines on "Sustainable" Investment Funds

The German Federal Financial Supervisory Authority ("BaFin") has published a consultation on draft guidelines for sustainable investment funds containing specifications on what UCITS and AIF management companies must include in the terms and conditions of a German fund that is designated or marketed as sustainable.

BaFin Consultation 13/2021 ("Draft Guidelines") provides for the minimum content that needs to be included in the terms and conditions of sustainable retail investment funds established under German law. The Draft Guidelines supplement and are linked to Regulation (EU) 2020/852 (Taxonomy Regulation—"TR") and to Regulation (EU) 2019/2088 on sustainability-related disclosure requirements ("SFDR").  

The Draft Guidelines would apply to investment funds referencing sustainability in their name (e.g., "ESG"/"sustainable"/"green") or being promoted as sustainable, including in a prospectus or other marketing materials. A retail fund wishing to use a sustainability reference in its name or for marketing purposes would need to include certain statements in its prospectus and terms and conditions. In this respect, the Draft Guidelines offer the following three options: 

  1. A minimum investment in sustainable assets of 75%. These assets must contribute significantly to achieving environmental or social objectives as defined in Art. 2 No. 17 SFDR or Art. 9 TR. In addition, no investment may harm any such objective, which will require certain minimum exclusion criteria—for example, a maximum of 10% of a portfolio company's turnover may come from energy production or other use of fossil fuels excluding gas. 
  2. Pursuit of a sustainable investment strategy, e.g. by using a "best-in-class" approach to the entire portfolio or by applying sustainability criteria and factors to at least 75% of the fund's assets, taking into account the environmental or social objectives stipulated in the SFDR or the TR. 
  3. Replication of a sustainable index, taking into account the environmental or social objectives stipulated in the SFDR or the TR. 

By introducing the Draft Guidelines, BaFin aims at counteracting the increasing risk of "greenwashing" while at the same time ensuring higher retail investor protection. The Draft Guidelines will be amended once the European Union has introduced an ecolabel applicable to investment funds.

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