Sustainability
In financing of the sustainable transformation, the fund industry plays a key role as a significant capital-raising source. However, the lack of standards for investments that can be considered sustainable in terms of EU regulation leads to uncertainty in the market. The EU is working on several projects for this purpose. These include considerations for a classification system for sustainable products and the standardisation of sustainability reporting obligations. New ESMA guidelines provide more clarity for fund names with sustainability references.
The EU is aiming for a climate neutral economy by 2050 and wants to support sustainable economic sectors and production processes by directing capital flows into corresponding activities. The fund industry, as a significant capital-raising source is happy to play a key role in this endeavour. Asset managers have a longstanding track record of financing sustainable projects and companies or offer sustainable products or services. As early as 2012, the BVI introduced its ‘Guidelines for Responsible Investment’.
Although EU legislators have adopted a flood of detailed regulations, they have not yet established any valid definitions of what consitutes a sustainable product. The EU taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) currently only govern transparency obligations. Therefore, the BVI supports the EU Commission's considerations to introduce a classification system for sustainable products. Among other things, a product category for sustainable transformation is being discussed. This would enable investors to distinguish between funds that invest in ‘green’ assets and those that support the transition from ‘brown’ to ‘green’ business models. Additionally, this could help curb discussions about greenwashing.
Im May 2024, the EU authority ESMA published guidelines for fund names using ESG or sustainability-related terms to combat greenwashing. The guidelines aim to prevent misleading fund names. ESMA has set a minimum threshold of 80 per cent of investments that are intended to achieve environmental resp. social characteristics or sustainable investment objectives for the use of sustainability-related terms such as ‘ESG’, ‘sustainable’ and ‘impact’. The guidelines also contain standardised exclusion criteria for various terms contained in fund names. The guidelines apply to all funds launched from 21 November 2024. For older funds with an ESG reference in the fund name, a transitional period of six months applies from the date of application of the guidelines, i.e. until 21 May 2025.
Since August 2022, investment advisors have to ask their clients about their sustainability preferences and offer suitable products. However, the lack of details and standards hinders the advice. Therefore, the BVI and the German Banking Industry and the Derivatives Association (BSW) have developed a joint target market concept for sustainable financial products. The concept provides a reliable minimum standard for the German market which is by date unique in Europe. In the meantime, the associations have revised the ESG target market concept and harmonised it with the standard of the ESMA guidelines for sustainability-related additions to fund names. This will remove the general exclusion of armaments in funds marketed as sustainable. However, the exclusion of banned weapons under international law remains in place.
Overall, there is much room for interpretation in investment advice remaining, due to the lack of regulatory guidelines. Among others, determining the minimum share of sustainable investments at fund level proves to be difficult, as there are no binding and consistent calculation methods. This may result in products pursuing a similar investment strategy whilst reporting significantly different shares of sustainable investments. This complicates understanding for both advisors and investors to understand and makes investment advice on sustainability very complex. Clear standards and the introduction of product categories for sustainability could help alleviate these issues in the future.
The regulation of ESG rating providers is also an important step towards clearer criteria and increasing the quality of sustainable investment products. In April 2024, the EU Parliament adopted the ESG Rating Regulation. According to this regulation, ESG rating providers will be subject to central authorisation and supervision by ESMA in the future. A key point of negotiation was the handling of internal ESG ratings created by fund companies for the purposes of their own products and services. The compromise now includes additional disclosure obligations regarding the methods of such internal ESG ratings if they are communicated to third parties as part of advertising. The ESG Rating Regulation is expected to come into force in 2026.
At the end of 2024, fund companies in Germany managed a total of just under EUR 1,050 billion in retail funds and Spezialfonds with sustainability features. At EUR 764 billion, retail funds accounted for just under three quarters of assets under management.