26-05-2025
Germany ‘Strongly' Urges Funds to Be Open About Defense Bets
(Bloomberg) -- Germany's financial watchdog is urging asset managers to be transparent about adding defense holdings to funds marketed as sustainable, amid concerns a sudden rise in such positions may upset some clients.
The guidance follows a decision by Germany's investment lobby to update exclusion standards, opening the door to a considerable increase in defense allocations. Asset managers say it's a way to align investing goals with the bloc's political agenda, as Europe adjusts to an increasingly entrenched war in Ukraine. The worry, however, is that investment clients who signed up for sustainable assets may balk at seeing their money go toward weapons of war.
'Issues that could be controversial need to be visible,' said Rupert Schaefer, chief executive director of strategy, policy and control at Germany's Federal Financial Supervisory Authority, or BaFin.
'We strongly recommend that firms don't disappoint their clients with insufficient clarity,' he said in an interview.
Europe's finance sector is in reset mode as fund managers from Scandinavia to France look for ways to support defense assets whose geopolitical significance has soared in the face of war and souring ties with the US. The pivot has also helped boost returns for ESG portfolios after years of underperformance. Funds that invested in Germany's Rheinmetall AG at the start of the year, for example, have been buoyed by its almost 200% rise in value.
In December, the German finance industry changed its so-called Target Market Concept, which had excluded many defense investments from funds that take account of environmental, societal and governance factors. DWS Group subsequently adjusted its documentation for certain funds, scrapping a threshold that ruled out companies with over 10% of revenue from defense activities. DWS Chief Executive Officer Stefan Hoops has said the development could free up 'hundreds of billions' of euros across Germany's asset management industry.
Other money managers have also adjusted their approach. In March, Allianz Global Investors informed clients that it would also lift existing restrictions on military equipment and services for some funds.
Schaefer, whose role includes steering BaFin's approach to sustainable finance, didn't name any firms.
'The presence of such investments in an ESG portfolio isn't something that should be relegated to the fine print,' he said in his office in Bonn. 'It's up to them how they go about it, whether via their websites, via the pre-contractual disclosure or in client conversations with advisers. The industry knows how to reach their clients.'
The changes are playing out as ESG funds struggle to hold on to clients. Last year, investors pulled about €9 billion ($10.2 billion) from German mutual funds with sustainability features, according to industry lobby BVI. It's a trend that's reflected across regions, with Morningstar Inc. estimating that the global market for ESG funds suffered its worst outflows ever last quarter.
More generally, Schaefer said 'there's significant room for improvement on disclosures to help ESG impact investors take decisions. The discussions around greenwashing persist and we hear from end investors who are overwhelmed by all the information and claims provided for ESG products,' he said.
The success of sustainable financial products hinges on practical regulation in the European Union, according to Magdalena Kuper, head of sustainability at BVI. While existing guidelines provide 'initial orientation' for investors interested in sustainability, disclosure rules need to feature 'simple to understand product categories' to create a comprehensive market standard, she said.
'We can't afford any more experimental regulation for sustainability,' she said.
The ESG investment industry's foray into defense assets comes amid a wider European Commission review of the bloc's Sustainable Finance Disclosure Regulation. BaFin supports the idea of 'basic product categories,' Schaefer said. The watchdog is 'bringing our ideas to the table,' and the sense inside the German regulator is that 'many others share our position,' he said.
When it comes to SFDR, 'it's also about increasing its effectiveness, and simplification, including reducing costs,' he said. 'It's going to mean fewer rules. And fewer, but clearer, disclosures.'
(Adds Hoops comment in sixth paragraph.)
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