ESG: Q&A on SFDR published by the BaFin

On 5 September 2022, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) published a Q&A document with clarifications on open questions regarding the interpretation of the European Sustainable Finance Disclosure Regulation (SFDR). Currently the Q&A document is only available in German language. The BaFin intends to expand the list of questions covered by its Q&A document on an ongoing basis.

The BaFin published the Q&A document to provide clarifications on how to interpret aspects of the SFDR as well as the Q&A documents published by the European Commission in July 2021 and May 2022; our detailed client notes on the Q&A documents can be found here. More specifically:

1. Q&A 1 - Application of the SFDR to independent financial advisers domiciled in Germany

The BaFin re-confirmed that German companies holding a licence to provide investment advice pursuant to Sec. 34f para. 1 of the German Trade Code (Gewerbeordnung) but which do not qualify as MiFID firms (so-called independent financial advisers - IFAs) are not in scope of the SFDR.

2. Q&A 2 - Interpretation of the term "promotion"

In light of the broad interpretation of the term "promotion" by the European Commission set out on page 8 of the Q&A document published in July 2021, the BaFin concluded that this requirement of Art. 8(1) SFDR can no longer be interpreted in the sense of the common linguistic usage "to advertise" (Werbung betreiben). In the Q&A document, the BaFin confirmed that it translates the English term "promotes" used in Art. 8(1) SFDR with the German term "fördern". The interpretation of the BaFin is in line with the European Commission's understanding of this requirement of Art. 8(1) SFDR. However, for this requirement to be met, the promotion must be targeted and externally communicated. In this context, BaFin has clarified that the mere fulfilment of the disclosure obligations under Art. 6(1) SFDR or a mere investment in (environmentally) sustainable economic activities is not sufficient for a financial product to qualify as a financial product within the meaning of Art. 8 SFDR.

3. Q&A 3 - Assessment of taxonomy-alignment for all investments underlying a financial product

Based on an assessment of the European Commission's responses on page 9 et seq. set out in the Q&A document published in May 2022, the BaFin concludes that there is no obligation to review every downstream investment of a financial product for taxonomy alignment and to collect relevant data. This view is in line with the position of the European Commission which confirmed that the SFDR and the Taxonomy Regulation do not require financial products to invest in taxonomy-aligned economic activities (cf. p. 11 of the Q&A document published by the European Commission in May 2022).

In the context of product-related disclosure requirements for financial products in scope of Art. 8 SFDR, which promote environmental characteristics, the BaFin expects that disclosures regarding the taxonomy alignment in the pre-contractual information and periodic reports will regularly be zero. With regard to the relevant paragraph in the Q&A document published by the European Commission in May 2022, it remains, however, unclear from BaFin's point of view whether the pre-contractual and / or periodic disclosures for taxonomy-alignment of financial products within the meaning of Art. 8 SFDR should be zero if either no data is collected at all (alternative 1) or if reasonable efforts to collect data were partially or completely unsuccessful (alternative 2). BaFin generally considers alternative 1 to be acceptable. In this respect it is possible that financial market participants may wish to disclose in the pre-contractual information a lower minimum commitment to taxonomy alignment than may actually be achieved. BaFin also considers that it may be possible for firms to disclose in periodic reports a lower taxonomy-alignment than it was actually the case. This leaves financial market participants free to decide how much effort they want to put into achieving to be allowed to disclose a higher taxonomy quota for the financial product. The BaFin explicitly states that it does not be consider this to be greenwashing.

4. Q&A 4 - Disclosures for pre-existing financial products

The BaFin clarifies that the European Commission's response on pre-existing financial products should be interpreted in a way that the disclosure requirements under Art. 10 and 11 SFDR apply to financial products whose distribution was discontinued before 10 March 2021, only if they would be in scope of either Art. 8 SFDR or Art. 9 SFDR. In BaFin's view, the assessment whether or not a financial product is an in-scope product must be based on the circumstances at the time of the respective distribution.

In order to determine whether a pre-existing financial product is in scope of the disclosure requirements under Art. 10 and 11 SFDR, the financial market participants will, according to the BaFin, be required to verify whether information on sustainability impacts within the meaning of Art. 8 or 9 SFDR was made available to customers during the distribution phase of such financial product. The assessment should be based on the documents used during the distribution to verify whether the information provided at that time meets the requirements of Art. 8 or 9 SFDR.

Finally, the BaFin confirmed that there are no pre-contractual disclosure requirements under the SFDR for financial products that are no longer distributed. According to BaFin's assessment, there is a lack of a pre-contractual disclosure situation. In this respect, no updated pre-contractual information is to be provided by the parties concerned.

The content contained in the Q&A document reflects the administrative practice of the BaFin. If the European Commission and/or the Joint Committee of European Supervisory Authorities publishes deviating information, the BaFin emphasised that it will re-visit the respective content of its Q&A document.

Please find our translation of the BaFin Q&A here.

Simmons & Simmons is closely monitoring the legal developments on ESG at a European and national level. For more information, please visit our microsite on Sustainable Finance and ESG Investment.