The German Federal Financial Supervisory Authority (BaFin) has issued a guidance notice on dealing with sustainability risks (ESG Guidance Notice). The binding German version was published on 20 December 2019 and later editorially modified on 13 January 2020. Further, BaFin has now also made available an English convenience translation.

The German regulator had launched a consultation based on a draft version in September last year (see our related publication on our blog). The administrative proposal attracted much attention with BaFin receiving more than 30 position papers in the course of the consultation. When finalizing the ESG Guidance Notice, BaFin took into consideration some of the objections raised without, however, substantially deviating from its initial draft.

The ESG Guidance Notice is a cross-sector publication and applies to all German entities supervised by BaFin including credit institutions, investment firms, insurance undertakings, fund management companies and pension funds. BaFin no longer mentions that credit institutions directly supervised by the ECB or German branches of EEA institutions operating under the European passport regime may also take into account its recommendations.

The objective of the ESG Guidance Notice is to provide entities supervised by BaFin with guidance on dealing with environmental, social and governance risks (ESG) with a specific focus on risk management. Although the final version covers the same topics as the consultation version, BaFin now further emphasizes the non-binding nature of its guidance. BaFin expects supervised entities to ensure that sustainability risks are also considered and that this process is documented. However, supervised entities are free to choose their approaches and methods.

BaFin initially does not intend to set out requirements for the audit of supervised entities. However, in its final ESG Guidance Notice, BaFin already announces that such requirements are to be expected at a later stage in order to implement European law requirements.

For more insights on ESG and sustainable finance, please visit our dedicated knowledge hub, ESG Insight.