BaFin's Draft Guidance Notice On Dealing With Sustainability Risks Raises Concerns From Market Participants

Author:Mr Holger Schelling and Michael Huertas

The German Federal Financial Supervisory Authority (BaFin) published1 on October 16, 2019, its Consultation 16/2019: Guidance Notice on Dealing with Sustainability Risks (the Draft Guidance Notice). The objective of this Draft Guidance Notice is to provide entities supervised by the BaFin with guidance on dealing with the increasingly important issue of sustainability risks. The Draft Guidance Notice represents an addition to the BaFin's expectations set out in its minimum requirements for risk management (Mindestanforderungen an das Risikomanagement - MaRisk) that already provide guidance for risk management by credit institutions2, insurance undertakings3 and asset management companies4.

This Client Alert looks at the Draft Guidance Notice and analyzes the strategies for responsible governance and business organization that the notice proposes in light of the central issue of risk management. The BaFin's actions in this area are likely to be of interest not only for entities supervised by the BaFin, but also for non-German entities, since the principles of the Draft Guidance Notice may begin to serve as inspiration for similar action at the EU level or by other national regulators. Although the Draft Guidance Notice is likely to be amended following the consultation, affected firms may already want to begin to forward plan how to implement these BaFin expectations.

The Draft Guidance Notice was published for public consultation, and interested stakeholders had the opportunity to comment on the BaFin's expectations and recommendations. The consultation period ended on November 3, 2019.

Overview of the Draft Guidance Notice

In terms of structure, the Draft Guidance Notice is split into 10 sections, with the first two set as an introduction. There the BaFin is keen to highlight the fact that the Draft Guidance Notice does not change the already existing legal requirements contained in the BaFin Circulars MaRisk, MaGo and KAMaRisk and that the relevant risks should continue to be adequately considered and documented appropriately by concerned entities. The Draft Guidance Notice also does not purport to reduce or extend any legal or supervisory requirements already in force as regards sustainability risks.

Sustainability risks are defined as environmental, social and governance (ESG) events or conditions that may potentially have negative impacts on the asset, financial and earnings situation or reputation of an entity. BaFin regards...

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