The German institute of auditors, IDW, has issued practical advice for accountants to apply the Sustainable Finance Disclosure Regulation (SFDR) in cooperation with the financial supervisory authority BaFin.
The advice would help auditors to work towards minimising the risks of greenwashing within a market pool of financial products and services.
Auditors should not only check whether the required information is disclosed, but should also make sure the information is correct and complete, particularly in the case of greenwashing risks, BaFin said in a statement.
This applies to information on ESG products that investors receive to make a decision and that are to some extent available in reports periodically, BaFin added.
The advice also applies to information on whether a person or institution subject to disclosure regulations has taken into account the “important negative effects” that advice on investment or rather an investment decision could have in terms of ESG. The auditor must at least check the plausibility of the information.
Both groups – BaFin and IDW – however, are not required to conduct a full audit, but only to check whether the information provided by investee companies is plausible, therefore the risk of greenwashing remains, the regulator warned in the statement.
The latest guidance underlines that providers of financial products must give potential investors relevant information with regards to ESG aspects of the investment in a uniform manner. Investors would then understand how sustainable a financial product is and what kind of impact risks relating to sustainability could have on returns, BaFin said.
In Germany, BaFin has the task of monitoring the compliance with the disclosure regulation in connection with the European taxonomy in financial services to prevent greenwashing.
The Fund Locations Act – Fondsstandortgesetz – has assigned auditors the task to assess whether the requirements of the disclosure regulation are met, to support BaFin’s work.
Legislators consider a review assessing the compliance with the disclosure requirements necessary every year. BaFin will also conduct random checks.
Challenges
Auditors currently face the challenge caused by the fact that European supervisory authorities have not yet finalized the specific regulations, so-called level 2 regulations, on disclosure obligations.
The European Union plans to start applying the regulatory technical standards (RTS) of the SFDR next July, according to previous reports.
Moreover, whoever is required to disclosing rules lack data from companies necessary to meet requirements. For this reason the EU Commission has proposed the Corporate Sustainability Reporting Directive to amend the existing rules introduced with the Non-Financial Reporting Directive (NFRD).
The EU wants to steer private funds to finance sustainable economic activities to contain the consequences of climate change.
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