Germany 'strong' urges money to be open about defense bets

(Bloomberg) – Germany’s financial watchdog requests asset managers to be transparent about adding defense to funds marketed as sustainable, amid concern that a sudden rise in such positions may upset some clients. The guidelines follow a decision of Germany’s investment failure to update exclusion standards, which open the door for a significant increase in the defense allocations. Asset managers say it is a way to align investment goals with the political agenda of the block, as Europe adapts to an increasingly entrenched war in Ukraine. The concern, however, is that investment customers who have entered sustainable assets can see that they are going into the war weapons. “Issues that can be controversial must be visible,” says Rupert Schaefer, CEO of strategy, policy and control at the Federal Financial Supervisory Authority of Germany, or Bafin. “We strongly recommend that firms do not disappoint their clients with insufficient clarity,” he said in an interview. Europe’s financing sector is in a reset mode, as Fund managers from Scandinavia to France are looking for ways to support defense assets whose geopolitical interest has risen in the face of war and the care of ties with the US. The pivot also helped increase the yields for ESG portfolios after years of underperforming. For example, funds that invested in Germany’s Rheinmetall AG at the beginning of the year are through the increase in value of almost 200%. In December, the German financing industry changed its so-called target market concept, which excluded many defense investments from funds that take into account environmental, societal and management factors. DWS Group then adjusted its documentation for certain funds and scrapped a threshold that excluded businesses with more than 10% of the income from defense activities. DWS CEO Stefan Hoops said the development could liberate ‘hundreds of billions’ euros in the Germany’s asset management industry. Other money managers also adjusted their approach. In March, Allianz Global Investors informed clients that they would also raise existing restrictions on military equipment and services for some funds. Schaefer, whose role Bafin’s approach to sustainable finances includes, mentioned no businesses. “The presence of such investments in an ESG portfolio is not something to be transferred to the fine print,” he said in his Bonn office. ‘It is up to them how they are going, either through their websites, via the pre-contractual disclosure or in client conversations with advisors. The industry knows how to reach their customers. ‘ The changes play out as ESG funds struggle to hold on to customers. Last year, investors raised about € 9 billion ($ 10.2 billion) from German mutual funds with sustainability features, according to industry foyer BVI. It is a trend reflected in the regions, with Morningstar Inc. estimating that the global market for ESG funds had its worst outflow ever in the last quarter. More in general, Schaefer said: “There is a significant space for improvement on revelations to help ESG influence investors. The discussions around green wash continue and we hear about end investors overwhelmed by all the information and claims provided for ESG products,” he said. According to Magdalena Kuper, head of sustainability at BVI, the success of sustainable financial products depends on practical regulation in the European Union. While existing guidelines provide ‘initial orientation’ for investors interested in sustainability, disclosure rules must simply ‘understand product categories’ to create a comprehensive market standard, she said. “We can no longer afford experimental regulation for sustainability,” she said. The ESG investment industry’s journey to defense assets is coming amid a larger European Commission overview of regulating sustainable finances. Bafin supports the idea of ​​’basic product categories’, Schaefer said. The watchdog is ‘to bring our ideas to the table’, and the sentence in the German regulator is that ‘many others share our position’, he said. As far as SFDR is concerned, “it is also about increasing its efficiency and simplification, including reducing costs,” he said. “It’s going to mean fewer rules. And less, but clearer, revelations. ‘ (Add hoops’ comments in the sixth paragraph.) More stories like these are available on Bloomberg.com © 2025 Bloomberg MP