On 24 September 2019, the German Federal Financial Supervisory Authority (BaFin) published a draft guidance notice on dealing with sustainability risks for consultation (link; only available in German). BaFin expects supervised entities to also take into account environmental risks, social risks and risks arising from corporate governance (commonly referred to as environmental, social and governance – ESG) and, for that purpose, provides a compendium of good practices.
The guidance notice applies to all entities supervised by BaFin including credit institutions, investment firms, insurance undertakings, fund management companies and pension funds. It does not directly apply to credit institutions directly supervised by the ECB and to German branches of EEA institutions operating under the EU passport regime. However, BaFin expresses its expectation that those institutions take into account the recommendations set out in its guidance notice as well.
In connection with ESG, the draft guidance notice addresses the following topics:
- strategies of supervised entities
- responsible corporate governance
- business organization
- risk management
- regulatory stress tests
- outsourcing
- group structures
- use of ratings
The core issue of the draft guidance notice is risk management: BaFin outlines risk identification, risk management and risk controlling processes taking into particular consideration ESG-related risks.
Interested parties may submit their comments on the draft guidance notice by 3 November 2019.
For further information and materials on key regulatory developments relating to ESG, please visit our ESG insight page located on our Asset Management Regulation hub. Registration to the hub is free via the NRF Institute portal.