ESG requirements: BaFin expects these sustainability criteria from supervised companies

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• ESG criteria can influence investment decisions
• BaFin also has corporate sustainability in mind
• Germany should assume a leading role in international competition

Sustainability in the focus of investors

When making an investment decision, investors often not only ask about a company’s solid sales figures, but also about its efforts in the area of ​​sustainability. Sustainability can now be better measured using ESG factors, which encompass the areas of environment (environment), social (social) and governance (governance). Various analysis companies offer score systems that certify that a company is already acting sustainably or that it has some catching up to do. Entire indices or ETFs are often put together based on these point systems, which are intended to make it easier for investors to invest sustainably. For example, the electric car maker Tesla had to vacate its place in the S&P 500 ESG index, partly because reports of poor working conditions in the Musk Group’s factories were piling up and accidents, some of them fatal, in connection with the “Autopilot” driving assistant were not sufficiently investigated .

Companies are already making progress – but there is still room for improvement

The Federal Financial Supervisory Authority (BaFin) also spoke at the “Sustainable Finance” conference about what it expects of companies that are the responsibility of the authority, as stated in a statement. “Integrating ESG risks into the risk management process is a must for every financial company,” says Dr. Thorsten Pötzsch, who heads securities supervision at BaFin. It should be emphasized that companies have to deal with possible risks in relation to sustainability at the management level. In this context, Pötzsch praised companies that have already made significant progress in the ESG area. Nevertheless, there is still a lot of catching up to do, as Raimund Röseler, Executive Director of Banking Supervision, pointed out. “Especially smaller institutions have not yet sufficiently integrated climate risks into their risk management,” he explained. “To put it another way: Many do not yet have a robust strategy for dealing with climate risks. That has to change.” Although one cannot expect changes overnight, a postponement cannot be granted. Here it is important that banks not only identify ESG risks, but also document them adequately and incorporate them into their processes.

Insurers act as investors and risk carriers

Insurers also have a dual role, as Executive Director of Insurance Supervision Dr. Frank Grund revealed. The companies are not only regarded as investors, but are also risk carriers. “It is important to me that insurers not only deal with sustainability risks with their capital investments, but also systematically with their underwriting,” pleaded Grund. “The heavy rain event in summer 2021 once again made the consequences of climate change for the insurance business particularly clear.” But insurance companies can also significantly advance the economy in their role as investors. This means that they are also obliged to provide information at EU level, for example with regard to data on the entire group or on individual products. “Here it is important to us that what is promised is kept – especially with regard to the sale of products”, as Grund stated. “Wherever it says sustainability, it must also contain sustainability.”

Reporting is a mammoth task

Clear rules also apply to securities. Since August 1, 2022, capital management companies have had to record possible risks associated with ESG issues in their risk management processes. BaFin leaves the companies open as to the form in which this takes place. If anything is unclear, the supervisory authority will support companies with a leaflet. Nevertheless, this task could pose a challenge – Pötzsch is also aware of this: “There is no question that integrating sustainability risks into the risk management process is very time-consuming, especially in the securities area. Nevertheless, this work is absolutely necessary for every financial company.”

ESG labeling required

However, BaFin President Mark Branson emphasized that it is not within the authority’s remit to evaluate companies based on their sustainability. “That’s not our role, nor do we have the necessary expertise.” Rather, one must ensure transparency, which protects consumers in particular. As a consumer, you have to be able to clearly see whether investment products are investing in companies that are already operating “green” or are currently in the process of changing. As an example, Branson mentioned whether companies are still dependent on nuclear power or gas or whether they are already increasingly using renewable energies. To this end, the BaFin boss called for suitable labeling of the corresponding products, on the basis of which investors can then make decisions.

Expansion of the ESG location Germany

In addition, it could not only be worthwhile for investors to reliably provide sustainable investments, but also for Germany as a competitive location. like dr Florian Toncar, State Secretary in the Federal Ministry of Finance, stated in a comment that the federal government wants to develop Germany into a sustainable finance location that plays a leading role worldwide. “It is therefore essential for us that Sustainable Finance (SF) raises the awareness of the financial industry for risks and opportunities with regard to sustainability aspects and changes capital flows in such a way that the 17 global goals of the United Nations Agenda 2030 for sustainable development are achieved and that Paris climate protection agreement will be implemented,” explained Toncar. “BaFin’s commitment and goal of combating greenwashing make an extremely valuable contribution to this.” This means the approach taken by companies to present significantly higher efforts in the ESG area than are actually being pursued.

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