The BaFin draft guidance notice on sustainability

Video | November 2019 | 4:47

Video Details

The BaFin draft guidance notice on sustainability

Simon Lovegrove

Hello everyone and welcome to our latest ESG Insight video. Today I’m joined by Caroline Herkströter, a Partner in our Frankfurt office.

The Federal Government of Germany wants to make Germany a leading sustainability centre. To this end the German regulator, the BaFin, has recently issued a guidance notice on sustainability risk.

Caroline on the guidance notice itself what are the objectives?

Caroline Herkströter

The specific objective of the guidance notice Simon is to give the entities supervised by BaFin a guidance and a clear indication of how to deal with the more and more and increasingly becoming important as to the mobility risk issues.

So even though the notice makes clear, and BaFin makes clear, that they do not intend to reduce or extend any binding legal obligation. If you go through it you will see that BaFin gives a clear view on what they expect the supervised entities to do with respect to risk strategies, etc. and with respect to sustainability risk.

Simon Lovegrove So the guidance notice is a set of good practice guidelines for entities but what entities are in scope of the guidelines? 
Caroline Herkströter
They apply to all entities supervised by BaFin, which means not only the credit institutions but insurance companies, pension funds, asset managers, financial services institutions as well at the foreign branches. But they might also apply to third country branches which are supervised by BaFin, so the scope is very broad.
Simon Lovegrove And interestingly the guidance notice also describes what the sustainability risks are and also the characteristics of such risk and then it goes on to discuss the strategies that entities should use to handle sustainability risks.
Caroline Herkströter

That’s true. BaFin gives a definition of sustainability risk which is interesting and says it includes physical as well as transition risks and gives as well definitions as what to it is and its independencies. BaFin makes nevertheless clear that sustainability risk has to see as being part of the already known and existing risk because it will be difficult to define sustainability risk on its own which means it is part of credit risk, counterparty risk, operational risk, reputational risk. So sustainability risk is seen as being part of all existing risk categories we know.

As a consequence BaFin says that institutes have to review their risk strategy in this respect and either implement the sustainability risk and existing risk strategy or defining a standalone sustainability risk strategy.

Simon Lovegrove
The guidance notice also discusses the so-called term “from the top”. What the management board should be doing. What are your thoughts?
Caroline Herkströter
The management board is responsible for the sustainability risk strategy and all the measures that have to be taken.
Simon Lovegrove
Caroline as you work through the guidance notice the BaFin picks up on three areas of particular importance: outsourcing the use of ratings and group issues. Just picking up on the important issue of outsourcing, what are your thoughts?
Caroline Herkströter
BaFin makes clear that sustainability risks is something which also should be reflected in the outsourcing guidelines. It means that each business area process or task have been reviewed with respect to whether there is a sustainability risk or not and this has to be reflected in the outsourcing agreement and strategy.
Simon Lovegrove
Caroline on the 5th November in Frankfurt, you’re holding a sustainability seminar.
Caroline Herkströter
That’s true we will hold a sustainability reception, a panel of really interesting speakers and details of that can be found on our Regulation Tomorrow blog.
Simon Lovegrove

Thanks Caroline. Good luck with your event on the 5th November.

That concludes this video. Further information on the BaFin’s approach to sustainability risk can be found on the German section of our ESG Insight Hub.

Goodbye.

Simon Lovegrove discusses BaFin’s guidance notice on sustainability risk with Caroline Herkströter.