DDV has published a revised version of its sustainability standards for structured securities.
The German derivatives association - Deutscher Derivate Verband (DDV) - has agreed on a revised, expanded edition of the DDV Sustainability Code of Conduct, to incorporate statutory provisions for sustainable finance that have changed since the association’s guidelines were published in April 2021.
The new DDV Sustainability Code of Conduct reflects the amended statutory requirements and sets out a new optional model called the Sustainable Asset Pool, which is aimed at meeting specific investor needs under very detailed conditions for structured securities.
Our objective remains to offer investors a range of structured securities based on standardised products that meet their sustainability objectives
“We believe that the regulatory and supervisory framework for sustainable finance will take several more years to evolve and that political and societal priorities are currently being reassessed. Even if the environment is dynamic and complex, our objective remains to offer investors a range of structured securities based on standardised products that meet their sustainability objectives,” said Dr Henning Bergmann (pictured), the DDV’s managing director.
The DDV’s new Sustainability Code of Conduct is based on the revised target market model for the financial sector in Germany.
The target market model was conceived jointly by the German Banking Industry Committee (Deutsche Kreditwirtschaft – DK), the German Investment and Asset Management Association (Bundesverband Investment und Asset Management – BVI) and the DDV.
In line with European regulatory requirements, it subdivides securities with sustainability characteristics into three categories including impact-related ecological investments within the meaning of the EU Taxonomy Regulation; products with a sustainability-related impact as specified in the Sustainable Finance Disclosure Regulation (SFDR); and products that exclude certain adverse environmental and social impacts (Principle of Adverse Impacts – PAI).
Structured securities can contribute towards sustainability either through the issuer’s business operations or – and this is new – by allocating the issue proceeds to projects or investments with certain sustainability characteristics, which constitute the Sustainable Asset Pool.
Issuers in this pool ensure that they will hold assets that generate ecology- or sustainability-related impacts or that avoid adverse environmental and social impacts (PAI) – at the very least in the amount of the issue volume and over the term of the structured security concerned. In this way, the investors’ funds will be linked with financing for business operations that generate ecology- or sustainability-related impacts or PAI.
These assets will be reported separately from the issuer’s other assets on the balance sheet and the pool will be regularly reviewed. Issuers who apply the DDV’s Sustainability Code of Conduct commit themselves to comply with the Code when they publicly offer structured securities with sustainability characteristics to private investors in Germany.
Why is the DDV’s main concern in relation to the application of sustainability standards for structured securities?
Henning Bergmann: The DDV supports the shift towards greater sustainability. It is therefore important for us to create up-to-date standards for structured securities with sustainability characteristics and objectives, thereby making a contribution to sustainable finance. Our goal is to ensure that structured securities are part of the sustainable finance framework and that a variety of sustainable structured products are available to private investors for their individual investment strategies. The DDV Sustainable Finance Code of Conduct aims to provide transparency and reliability for sustainable investment in structured products, and thus create trust in the market.
The structured products industry and the DDV are clearly committed to the transformation of our economy and society towards greater sustainability and climate protection. It is one of the great tasks of our time, and both the EU and German policymakers rightly have this issue on their agenda.
Do you think the SFDR is adding a layer of complexity when it comes to disclosure? What are the challenges/issues when it comes to the overlapping between rules (Priips, Mifid 2, SFDR) – is regulation becoming too complex?
Henning Bergmann: The transparency requirements under the SFDR apply only to part of the Mifid 2 and Priip product universe. As a result, the SFDR does not sufficiently reflect the typical features of financial instruments that do not qualify as financial products as defined in the SFDR. Instead, it is very much oriented towards Ucits, AIFs, and insurance products – with SSIPs, green bonds, and other non-SFDR products being side-lined. Only a comprehensive and well-balanced set of sustainability disclosures encompassing the full range of financial instruments as defined in MiFID II, taking into account their respective specificities, will serve both investors’ needs and the overarching goal of reorienting private capital flows towards a more sustainable economy.
In addition, the differing definitions of sustainability according to MiFID II and the Disclosure Regulation make investment decisions for retail investors more complicated. A harmonisation of these definitions would be more than welcome.
Do you think the DDV standards could be applied to other markets?
Henning Bergmann: The DDV standards are intended for German structured securities and drafted on the basis of the German Target Market concept. As such, they reflect the regulatory situation and distribution needs in the German market. However, we hope that the DDV code can also help to establish structured securities in other markets, according to EU standards.
Similar reflection is on its way in other EU member states and beyond, and the DDV is in constant dialogue with its European counterparts, in particular the Austrian and French associations. The exchange of ideas and practices, as has taken place with regard to the Sustainable Asset Pool, will hopefully form the foundation for solutions that contribute to the promotion of sustainable finance in the area of structured securities.