Fiduciary duty in the 21st century: Germany roadmap

Government leadership

• The Federal Government should send strong signals on the importance of sustainable finance, including:
  • Germany’s financial regulator, BaFin, and the Federal Ministry of Finance should clarify that investors and other organisations in the investment system must take account of ESG issues in their investment processes and decisionmaking, encourage high standards of ESG performance in the companies or other entities in which they are invested, and support the stability and resilience of the financial system.
• Government-related funds should also demonstrate leadership:
  • The Federal and Länder civil service schemes should publicly commit to responsible investment and publish details of their approach.
  • Given the importance of Germany’s banking system for inter-bank and inter-company financing, commitments to responsible investment should also extend to state-owned Landesbanken.

Institutional investors

• Legal clarity and consistency: The Prudent Person Principle embedded in the Pension Insurance Act (Versicherungsaufsichtsrecht – VAG) will be amended as part of the transposition of the revised EU Institutions for Occupational Retirement Provision (IORP II) Directive. As part of this transposition, the Ministry of Finance should propose to amend the Pension Insurance Act to clarify that all institutional investors should consider financially material ESG issues.
• Preparation for upcoming EU Directives: Tools, education and best practice case studies should be provided to German IORPs (Pensionfonds, Pensionkassen) to help them prepare for the ESG aspects of the IORP II and Shareholder Rights Directive (and, if relevant, the CSR Directive). Interviewees indicated a preference for this to be developed by BaFin in collaboration with industry associations.

Occupational pension fund reform:

• New defined contribution (DC) schemes should publicly commit to responsible investment and ensure that ESG risks are considered as part of investment decision-making across all funds.
• Such schemes should also consider, and respond to, the ethical preferences of their members. This should not be confused with the management of financially material ESG risk.

Fund managers

• BaFin should issue guidance to fund managers clarifying that the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) requires consideration of material ESG issues.
• The impact of this guidance should be monitored: If this is not successful in encouraging widespread adoption of ESG, the Federal Ministry of Finance should propose to amend the Capital Investment Code.

Implementation of the CSR directive

• The German Federal Ministry of Justice and Consumer Affairs (BMJV) should issue guidance to public interest entities complying with the new requirements, including that:
  • For financials, investments are in scope for their reporting. Where possible, this should be aligned with upcoming reporting requirements under the IORP II and Shareholder Rights Directives.
  • For non-financial corporates, investments such as pension schemes and contractual trust agreements are in scope for reporting.
• The German Parliament should monitor the implementation of amendments to the Handelsgesetzbuch (commercial law code) to: Ensure high-quality disclosure of ESG factors with clear links between ESG factors; a company’s business model and risk factors; and to allow for investor comparability by industry, portfolio and across time-series.

Produced in collaboration with UNEP FI and Generation Foundation