The German financial supervisory authority, BaFin, has given the green light to a collaborative engagement platform for asset owners and asset managers, one of the top priorities set by the sustainable finance advisory committee, Sustainable Finance-Beirat, the body advising the government on its sustainable finance strategy.
“So far, there has been few examples of collaborative engagement in Germany, and BaFin saw the risk of ‘acting in concert’,” Silke Stremlau, chair of the advisory committee, told IPE.
BaFin unveiled the approval of the engagement platform at the sustainable finance advisory board’s last meeting in Berlin.
Collaborative engagement means joint actions of different asset owners and asset managers to accelerate the transition to suitable business models in companies.
Stremlau added: “We know from many years of research that engagement often has a bigger impact on companies than, for example, ESG funds. This is not about voting at annual general meetings, but about background discussions between investors and those responsible in the companies on the broader topics of ESG and sustainability.”
The committee has set up six working groups to focus on a traffic light system for sustainable finance products – intended to help investors assess sustainability when investing. The products include: an engagement platform, data infrastructure and digitalisation, financing the economic transformation, reporting and measurement, national and international affairs (politics and economics), the committee said.
ESMA draft guidelines
The committee has also taken a stance on the consultation launched by the EU’s financial markets regulator and supervisor, the European Securities and Markets Authority (ESMA), on the draft guidelines on the use of ESG or sustainability-related terms in funds’ names.
ESMA proposes to define a quantitative threshold (80%) for the use of ESG-related words for funds, including a 50% threshold for the use of “sustainable” or any sustainability-related term.
It also wants to apply minimum safeguards to all investments for funds using such terms (exclusion criteria), and additional considerations for specific types of funds (index and impact funds).
The sustainable finance advisory committee is in favour of a quantitative threshold, but not 80%. The guidelines, instead, should follow the same principles as other regulation addressing fund names of minimum 51% investments with ESG characteristics, it said in its response to ESMA.
It also recommends the allocation of a higher share (25%) of the assets to cash and derivatives, necessary for liquidity and risk management.
The committee has also says in its response to ESMA that it is against the 50% threshold for the use of “sustainable” or any sustainability-related term, saying that it is necessary to clarify the definition, calculation method and reference (e.g. NAV) for “sustainable investments” according to article 2(17) of the SFDR; against the exclusions based on the Paris-aligned benchmarks (PAB), against specific provisions for calculating thresholds in relation to derivatives or any other assets, and against specific provisions for “transition” or transition-related names.
It is instead in favour of applying the same requirements for funds’ names to index-replicating funds, and applying specific provisions for “impact” or impact-related names in the proposed guidelines.
“In principle, we welcome the consultation launched by ESMA, as we agree that there must be quantitative guidelines for ESG funds. During the consultation, we made suggestions for improvement,” Stremlau said.
The committee has decided to work on a not yet published taxonomy paper to tackle the challenges of the taxonomy regulation and propose solutions.
“In our paper we have listed these challenges from the point of view of the various groups, such as companies, auditors and financial institutions, explained and proposed solutions,” Stremlau said.
The taxonomy is essential, according to the committee, offering the industry a wide range of incentives and a path to transforming the economy, but challenges lie both in the complexity, non-existent data and in the partial inconsistency with other regulations, such as the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation.
“There are structural challenges, challenges relating to the content, and practical challenges in the initial application [of the taxonomy],” Stremlau said, calling for the rebuilding of the economy towards resource efficiency and climate neutrality.
“It is also necessary that the remaining four environmental goals of the taxonomy are published and implemented, as well as the social taxonomy,” she added.