Germany: BaFin publishes Q&As on SFDR to clarify outstanding application issues

In addition to the Q&As on the EU Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088 – SFDR) published by the EU Commission in July 2021 and May 2022, BaFin has now published Q&As dedicated to application issues arising from these Q&As.

The BaFin Q&As among others provide clarifications in relation to the following:

Interpretation of the term “promote” according to Art. 8 SFDR

BaFin in essence confirms the EU Commission’s wide interpretation of the term “promote” in Art. 8 SFDR as included in the EU Commission’s Q&As of July 2021. Accordingly, also the fulfilment of legally required information obligations can be considered to qualify as a promotion within the meaning of Art. 8 SFDR. However, it is not sufficient for this qualification if only information is provided in respect to the way in which sustainability risks within the meaning of Art. 2 no. 22 SFDR are included in investment decisions. The "promotion" has to be targeted and communicated externally, so that a promotion is not given in case of a mere "being invested" in e.g. (ecologically) sustainable economic activities.

Potential obligation to review every investment underlying a financial product for "taxonomy alignment" – Application of the obligation to disclose a taxonomy ratio according to Art. 6 Taxonomy Regulation

According to BaFin's assessment, the EU Commission’s response in its Q&As of May 2022 does not lead to an obligation to examine every investment underlying of a financial product for "taxonomy alignment". With regard to Art. 8 products, a taxonomy ratio, amongst others, has to be disclosed. In BaFin's view, this taxonomy ratio can also regularly have the value "zero". In this context, BaFin considers the wording of the EU Commission unclear insofar as it does not explicitly state whether an investment is to be assessed with "zero" in the numerator of the taxonomy ratio if either no data is collected at all or if reasonable efforts to collect data were partially or completely unsuccessful. BaFin considers the first alternative ("no data collected") to be in principle justifiable.

Application of the disclosure obligation to existing contracts

The EU Commission has clarified that the transparency obligations of Art. 10 and Art. 11 SFDR have to be fulfilled for existing financial products whose distribution has ended before 10 March 2021. According to BaFin, this does not apply to all financial products, but only to those that fulfilled the requirements of either Art. 8 or Art. 9 SFDR at the time of distribution. Unhelpfully, BaFin states that financial market participants would have to "make available" the archived documents, read through them and determine whether any ESG-related disclosures made at that time now meet the requirements of Art. 8 and Art. 9 SFDR. As regards existing contracts that have not been distributed for more than ten years prior to the date of first application of the SFDR, i.e. 10 March 2011, BaFin considers it appropriate for financial market participants to base their analysis of whether such product would today qualify as a financial product in the sense of Art.8 or Art. 9 SFDR on general assumptions, provided they are not aware of any contrary findings.

Applicability of the SFDR to financial investment brokers pursuant to Sec. 34f of the German Trade Ordinance

As a rule, financial investment broker (Finanzanlagenvermittler) with a licence pursuant to Sec. 34f of the German Trade Ordinance (Gewerbeordnung) do not fall within the scope of application of the SFDR because they operate within the scope of the exemption of Sec. 2 para. 6 sentence 1 no. 8 of the German Banking Act (Kreditwesengesetz) and therefore are not financial services institutions and hence no investment firms.

They also do not have the obligation to identify the sustainability preferences of their customers under the MiFID II Delegated Acts.

BaFin will continuously expand its Q&As and base its administrative practice on the legal statements made therein (until further notice). However, changes may occur if the EU Commission or the ESAs’ Joint Committee publish diverging assessments.

The BaFin Q&As are in German language. We prepared a courtesy translation which you can request from your usual Linklaters contact.