Luxembourg Funds Intelligence Briefing (22/02/2021)

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CSSF’s Marx calls for new effort to extend AIFMD passport to third-country managers, and other business-critical fund industry news.

Luxembourg Funds Intelligence Briefing
22nd February 2021

CSSF CEO Claude Marx has reopened the debate on the once-planned extension of the Alternative Investment Fund Managers Directive passport to asset managers outside the EU, saying the expansion of the regime should go ahead, but a less complex rulebook for authorisation of third-country managers and funds is needed. Until a decision is reached, he says, there should be no move to call time on national private placement regimes. The extension of AIFMD passporting to non-EU managers and funds was envisaged under the original directive, and ESMA recommended that it should begin with managers and funds from Canada, Guernsey, Japan, Jersey and Switzerland, along with funds only from Hong Kong and Singapore. However, discussions were shelved after the UK, home to one of the world’s largest alternative fund management sectors, voted to leave the EU in June 2016.

— Simon Gray, Editor in Chief

Asset Management
Asset managers should be wary of illiquid assets despite pressure on returns: Union Investment

The low-interest-rate environment should not push asset managers to invest in illiquid assets, argues Christian Kopf, head of fixed income and currency at Germany’s Union Investment. Noting that higher yield also implies higher risk, Kopf says it is often possible to achieve the same yield by investing in liquid assets. He argues that client needs should be the main priority in any consideration of illiquid assets, as managers have a duty to maintain genuine liquidity as well as expected returns, but expects illiquid assets to be an even greater investment focus this year as pressure for returns grows.

Best source: Citywire

Fund Services
Apex Group completes acquisition of FundRock Management Company

International fund service provider Apex Group has completed the acquisition of FundRock Management Company and FundRock Partners, after receiving regulatory approval. Apex says the acquisition strengthens its management company offering and expands its overall range of services, follows the group’s acquisition of another Luxembourg-based ManCo, LRI, and that it will keep the FundRock brand. The group now has a total of $1trn in assets to which it provides administration, custody, depositary and management company services.

Best source: Delano

Luxempart takes stake in investment platform iM Global Partner

Luxempart and IK Investment Partner have acquired a 20% stake in iM Global Partner, a France-based network connecting asset managers, financial institutions, advisers and investors, from Eurazeo for €70m. Luxempart and IK Investment Partners will join Eurazeo and Amundi in actively supporting iM Global Partner, which has 11 locations in Europe and the US and $19bn of assets under management at the end of last year.

Best source: Luxembourg Times (subscription required)
See also: RiskAssur (subscription required, in French)
See also: Citywire

CSSF’s Claude Marx calls for new initiative to extend AIFMD passport to non-EU managers and funds

CSSF CEO Claude Marx has called for a rethink of financial sector regulation to reduce unnecessary complexity and administrative burdens. He says there is no evidence of a need to change the Alternative Investment Fund Managers Directive rules on cross-border delegation of asset management functions and substance, which could affect the provision of asset management from the UK, but says the EU should devise a less complex formula for extending the AIFMD passport to non-EU alternative managers and funds. Marx also sees scope to reduce reporting requirements that bring little value for supervisors, and calls for greater adoption of risk-based regulation, as well as efforts to find less burdensome ways of accessing key information.

Best source: Paperjam

UK regulator says Woodford will need authorisation to resume investment management business

The UK’s Financial Conduct Authority says Neil Woodford will need the regulator’s authorisation before returning to investment management as the regulator continues to investigate the collapse of his Woodford Equity Income Fund in 2019. FCA director of enforcement Mark Steward says Woodford, who has announced a new venture based in Jersey, would need permission to engage in a regulated activity in the UK. The FCA, which is in contact with the Jersey Financial Services Commission, would have to assess the firm’s business model and the fitness of its management, Steward says.

Best source: The Guardian

Facts and Figures
Specialised PSFs see profit fall by more than two-thirds in 2020: CSSF

The aggregate net profit of specialised financial sector professional entities fell to €95.7m in 2020, down from €290.1m the previous year despite turnover remaining stable, according to the CSSF. Specialised PSFs, which cover 10 business lines including family offices, domiciliation agents, management companies and depositaries, reported revenues of €5.779bn last year, down slightly from €5.863bn in 2019, while the number of employees in the sector increased from 5,183 to 5,476.

Best source: Paperjam (in French)

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Sustainability’s Surge To The Core Of The Fund Industry

Growing sustainable investment concept

Sustainability has been rising steadily up the to-do list of Europe’s fund industry for several years. But in 2020, as speakers at last month’s ALFI Rentrée conference made clear, ESG has become a priority in market segments ranging from exchange-traded funds to private equity. So what can we expect from sustainable funds?

In recent years, sustainability – a concept often used interchangeably with environmental, social responsibility and governance inputs into investment processes and operations – has been a regular theme of ALFI’s fund industry conferences and other deliberations on the future of the sector.

Like Ernest Hemingway’s line about how a character went bankrupt, its move from the sector’s periphery to its mainstream has come gradually, then suddenly.

It’s not easy to pinpoint exactly when sustainably shifted from a desirable option for ideologically engaged (or conscience-stricken) investors to a critical element in risk-return equations.

But the steady drumbeat of mostly dismal news about global warming has certainly helped.

So has evidence that tolerating mistreatment of employees or misuse of natural resources and habitats, even far down the supply chain, can lead to rapid, devastating and costly reputational damage, fanned by social media

And this year’s collapse of one-time German stock market darling Wirecard is merely the latest, particularly graphic illustration of how corporate governance failings are a red flag often signalling imminent investor losses.

Sustainable funds through the regulatory pipeline

Environmental and broader sustainability requirements for the financial services industry have been flowing through the legislative and regulatory pipeline for some time, especially in Europe. Now they are at hand, from reporting requirements on climate-related risks for investment funds and pension schemes to the EU’s Taxonomy Regulation, centrepiece of the European Commission’s sustainable finance action plan, which took effect in July.

But the shift toward sustainability has been accelerated by the ‘black swan’ of the Covid-19 pandemic. That includes evidence that destruction of natural habitats has heightened our vulnerability to virus-borne diseases, but also the perception that the economic reconstruction offers an opportunity to incorporate environmental and social concerns into long-term planning decisions.

It’s against this backdrop that speakers at last month’s ALFI Rentrée digital conference underlined how far sustainability has seeped into the outlook, strategies and practices of the fund industry, ranging from UCITS retail funds to long-term private equity investments.

Luxembourg’s ambitions writ larger

One person who needs no convincing is Claude Marx, CEO of the grand duchy’s financial regulator CSSF. He told conference participants: “Luxembourg’s fund industry has nearly €5 trillion in assets. If just 20% is placed in sustainable investments, €1 trillion, that will definitely place us on the map as a centre of the European Green Deal. It would present organisational challenges, but it’s definitely achievable.”

The government also says it’s committed to making Luxembourg a sustainable investment hub.

Finance minister Pierre Gramegna pointed out that in September the state launched the first sustainable – as opposed to green – sovereign bond to be issued by an EU member state or a triple-A rated country. Proceeds from the €1.5 billion bond, which was more than 10 times oversubscribed, will fund spending aligned with the United Nations’ Sustainable Development Goals.

Meanwhile, the Luxembourg Stock Exchange has just unveiled the LGX DataHub, a centralised database for green and sustainable bonds that will structure currently unstructured data and by year-end cover the entire sustainable bond universe.

Luxembourg’s ambitions mesh with the success of the EU in establishing itself as a standard-setter in sustainable finance. Pablo Portugal, director of the Association for Financial Markets in Europe, noted that this is one of the successes of the otherwise unfinished strategy to create an EU Capital Markets Union.

“The EU has become a global regulatory and market leader, for example with the adoption of the Taxonomy Regulation,” he said. “Several member states have led the way with ESG bonds in response to Covid-19.”

Passing the test

At the onset of the pandemic, sustainable investment advocates worried that a desire for returns from any source might become a higher priority – and that governments might abandon green ambitions for fear of complicating economic recovery.

In fact, according to Deloitte partner François-Kim Hugé, “Covid-19 was the first big test of ESG investing, and it proved equal to it: in the first quarter, sustainable funds worldwide saw inflows of $45.7 billion, while the fund industry as a whole saw outflows of $384.7 billion.”

Alain Mandy, chief operating officer for funds at Wellington Management, says demand from institutional clients has accelerated this year for greater clarity on the sustainability of investment portfolios and for screening solutions.

However, he says the industry will be tested by new disclosure requirements due to a lack of consistency in rules among EU countries, differences among sustainability data providers and the idiosyncrasies of investors own preferences.

Industry members had become increasingly concerned about the March 2021 deadline for compliance with the EU’s Sustainable Finance Disclosure Regulation, requiring asset managers to report on their sustainably risks.

The measure has been billed as an important tool to combat greenwashing. At the conference, Luxembourg Stock Exchange deputy CEO Julie Becker urged that the compliance deadline should not be postponed, “even if we accept that the first batch of disclosures will be imperfect”.

But the European Commission has now indicated that while the legislation will still take effect on schedule in March, asset managers will have more time – potentially until 2022 – to comply with the disclosure requirements, in part because Covid-19 considerations have pushed back finalisation of the detailed rules.

Investor confidence on sustainable funds’ performance

Nevertheless, Sean O’Driscoll, Universal-Investment’s country head for Luxembourg, says the trend is inescapable: “No onboarding of new clients takes place without discussions on ESG.”

Table showing ESG Fund assets globally and per region

That’s down in part to increasing confidence among investors that sustainable investment doesn’t entail a penalty in performance; indeed, growing evidence shows that incorporating ESG into strategies can actively enhance returns.

And, says Commerz Real head of impact investing Tobias Huzarski, that doesn’t take into account the broader costs of businesses such as fossil fuel extraction and energy generation borne by society as a whole: “If non-sustainable activities had to internalise their environmental and social costs, their returns would be much lower.”

According to Peter Veldman, head of fund management for EQT Partners, sustainability today is an integral element of the private equity industry’s investment process and operations: “It’s not just about a particular investment, but everything we do. Businesses that resort to greenwashing will be gone before long.”

Change is fast

Karim Khairallah, a portfolio manager at distressed debt specialist Oaktree Capital Management, agrees:”It’s critical to have sustainability in a firm’s DNA. A lot of it is common sense – we were previously 95% there already, but now we have processes in place to manage and monitor compliance, and to identify and fix issues at portfolio companies we acquire.”

Industry members say the speed of the shift toward sustainability is particularly striking.

Jamie Broderick, a former JPMorgan Asset Management managing director and now a board member of the non-profit Impact Investing Institute, argues that the advent of Covid-19 has shifted the focus from exclusively climate change to a broader range of environmental and social issues – for example, how to achieve a ‘just transition’ to a low-carbon world.

Broderick told the ALFI Rentrée audience that sustainability is “unfolding faster than anything I’ve ever seen in asset management. We used to think of sustainability as something philosophical, emotional or ideological, but if you follow the money, the flows of capital show it’s a challenge for managers whatever their personal stance.”

If you’re interested in sustainability, finance, and the funds sector, you should read:

There Are Too Many Shades Of Grey In Green Finance

There’s no escaping the growth of green finance. Every quarter charts new records for issuance of green bonds or investment in funds that describe themselves as sustainable or that follow an investment policy guided by considerations of environmental, social responsibility and governance.

Meanwhile institutional investors around the world are using their weight as providers of corporate financing to push companies toward greater respect for the environment and the welfare of employees in their own operations and in supply chains and, increasingly, to commit to reduce carbon emissions in measurable ways or set a date to achieve net zero status.

This trend is now a fact of life in the financial industry, not least because of the role of institutions in pressing companies and financial service providers to embrace environmental and other sustainability goals, as well as the determination of the EU to implement legislation to increase public accountability.

Here’s a telling data point: the proportion of global investors that apply ESG criteria to at least a quarter of their total investments has risen from 48% in 2017 to 75% last year, according to Deloitte.

Open questions about the ‘green’ in green finance

Yet, the significance of this green finance trend in changing corporate and financial behaviour is less easy to measure.

In fact, the size of the market and its different segments is open to wildly different estimates, both in terms of current levels and projections into the future.

And just how green or how sustainable some, or even most, of these investments or assets really are is an even more ‘known unknown’.

The problem is the absence of standardised, universally accepted definitions and rules setting out what constitutes sustainable or ESG investments, assets and projects — and similarly standardised mechanisms to measure compliance.

The EU’s Taxonomy Regulation, which seeks to define sustainable activities, should help to fill the gap, although it won’t be applicable until the beginning of 2022.

That’s why arguably ‘greenwashing’ — promoters awarding financial assets and products an environment-friendly or sustainable label they don’t warrant — is a lesser problem than the simple inability to determine what green (or sustainable) actually means.

The green bond market, which currently totals around €660 billion in outstanding debt, is forecast to rise to €1 trillion by the end of next year and €2 trillion two years later, according to the Netherlands’ NN Investment Partners.

However, it warns that only 85% of green bonds deserve the label; the rest are issued by companies that may be undertaking environment-friendly projects but whose practices in other areas breach environmental standards.

bar graph showing total number of new green bond issuers 2016-2019

Varying definitions of green finance

Take the investment funds numbers, for example.

Data provider Morningstar says European sustainable fund assets passed the milestone of $1 trillion during the third quarter, and global assets reached $1.26 trillion, while a record 166 new products were launched worldwide over the three months to the end of September, taking the total to 3,774 worldwide.

By contrast, the Global Sustainable Investment Alliance last year estimated that “some kind of environmental, social or governance analysis [in] investment decisions is now a factor” in $31 trillion of assets under management,

Meanwhile Optimas, a Boston-based capital markets consultancy, says the value of “global assets applying environmental, social and governance data to drive investment decisions” has almost doubled over four years, to $40.5 trillion this year. (By way of comparison, Boston Consulting Group estimates that the global asset management industry oversaw $89 trillion at the end of 2019.)

These numbers could conceivably all be correct, but it begs the question of what investments these very different totals include, how they are calculated, what constitutes the applicable sustainability or ESG principles, and how compliance with them is measured.

Misleading marketing

Some of the problems with the credibility of sustainable products are relatively easy to spot and have caught out major players like Fidelity Investments and State Street Global Advisors.

More broadly, the 2 Degrees Investing Initiative, a non-profit think-tank, has claimed that 85% of all “green-themed funds” have misleading marketing materials.

Together with the UN Principles for Responsible Investment network, the French-headquartered organisation has drawn up the Paris Agreement Capital Transition Assessment (PACTA), an online tool to measure the alignment of equity and fixed income portfolios with climate change scenarios. It says PACTA is used by more than 1,500 financial institutions worldwide, as well as by supervisors and central banks to assess the entities they oversee.

But it’s far from the only system in play and the credentials of providers aren’t always clear, notes Alessandro d’Eri, a senior policy officer at the European Securities and Markets Authority. “We have seen a boom in the number of..ESG rating and scoring providers, a largely unregulated area,” he says. “It is difficult for us to make sense of the scoring and rating if there is no clarity on the underlying methodology.”

Asset managers increasingly complain that some companies issuing green bonds are financing environment-friendly activities at the same time they’re involved or implicated in businesses whose impact is the contrary — like state-owned monopoly Saudi Electricity Company, which raised €1.3 billion from a green bond in September to install smart meters across its grid.

Constructive engagement

The Australian state of Queensland has issued bonds for initiatives including preserving the Great Barrier Reef, which is under threat from the impact of global warming, at the same time that it continues to promote expansion of its coal industry.

Others, like car manufacturers, are dressing up as green initiatives investment in production facilities for electric vehicles that they would be carrying out anyway. Still others are using green bonds to refinance investments they have already made.

Some equity investors in polluting companies or high carbon-emission industries justify their state on the grounds that it gives them the opportunity to engage with the businesses and encourage them to change their practices.

Maybe. But this, too, risks delivering an outcome that challenges quantification.

There’s no shortage of initiatives underway today to measure environmental and other sustainability factors to assist investment decision-making. The EU sustainable finance framework, which is well advanced, will progressively extend transparency requirements throughout the European financial industry, which could create the foundation for a standardised global rulebook.

Until then, though, when it comes to green finance, determining what is sustainable and what is not, what’s real and what’s greenwashing, is likely to remain as much art as science.

If you’re interested in sustainability, finance, and the funds sector, you should read:

LuxFLAG’s Denise Voss: “The EU Has A Will To Make The Climate Transition Just And Inclusive For All”

LuxFLAG, which for 14 years has pioneered the concept of fund labelling to provide investors with transparency about ESG and other sustainability criteria, is about to stage its second Sustainable Investment Week from October 12 to 16. Chairwoman Denise Voss says the Covid-19 pandemic has helped to focus attention on issues such as inequality and exploitative labour practices – and that the need for transparency and education on ESG matters extends beyond investors and the public to the fund industry itself.

Headshot of Denise Voss, LuxFLAG chairwoman
Denise Voss, Chairwoman of LuxFLAG

VB: What role has LuxFLAG played in the evolution of sustainable finance over the past 15 years?

Denise Voss: The Luxembourg Finance Labelling Agency is an independent and international non-profit organisation, founded in 2006 to promote the raising of capital for sustainable investment by awarding a recognisable label to eligible investment products.

LuxFLAG labels are recognised for their high standards and a rigorous assessment of the investment product’s investment holdings, strategy and procedures with respect to environment, social and governance matters as well as an affirmation of their transparency to investors – key components of the LuxFLAG eligibility criteria.

As of September 22, 2020, LuxFLAG had awarded labels to 303 investment products domiciled in 10 jurisdictions  – Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands and Spain – managed by 98 asset managers in 17 countries and representing approximately €128.2 billion of assets under management.

Sustainable finance has emerged as a major trend in the past couple of years. Through the award of labels to compliant investment products, LuxFLAG has played an important role in enhancing transparency and adding credibility toward investors.  These in turn have increased their investment in ESG or sustainable funds, resulting considerable growth in assets of sustainable products, which saw $71 billion of inflows during the second quarter of 2020.

Lack of common standards

VB: How can the fund sector and sustainable finance more broadly deal with the problem of ‘greenwashing’? Should the rules on what activities can be financed by green bonds be drawn more strictly?

DV: By contrast to traditional bonds, green bonds are intended to finance or re-finance ‘green’ projects such as renewables, energy efficiency, bioenergy and sustainable urban transport, water and waste. Investors have traditionally been cautious about investing in these instruments primarily due to a lack of transparency on the use of proceeds and the very nature of those underlying assets, often leading to the risk of greenwashing.

Part of the challenge has also been a lack of common understanding and standards around what we mean by green investments. Initiatives such as the voluntary guidelines issued by the International Capital Market Association in its Green Bond Principles have promoted best market practice and standards on the use of proceeds, project evaluation, selection, and management of proceeds and reporting.

The GBPs are widely accepted and used by bond issuers, but still on a voluntary basis. Obligatory requirements on adherence to the GBPs or similar initiatives could help prevent greenwashing, but given the early stage of market development and lack of commonly accepted frameworks, one also could consider their gradual implementation.

VB: The volume of assets in ESG funds has been increasing rapidly in the past couple of years and particularly in 2020. What factors are driving this growth?

DV: In my opinion, investors – traditionally institutions but now retail investors as well – and regulators are key drivers of this recent growth, in addition to increased awareness of issues such as climate change among the general public. Covid-19 has also focused investors’ attention on social issues such as inequality, and the challenges for many people to access food, clean water and a living wage.

Embracing the EU regulatory framework

VB: How is LuxFLAG aiming to establish itself as a standard for certification of ESG and other varieties of sustainable funds? Will its processes and certification be aligned with the EU’s sustainable finance rules?

DV: Labels are voluntary today and are often investor-driven. However, initiatives such as the EU Ecolabel will likely enhance and perhaps help drive the demand for labels. In any case, the EU Action Plan for Sustainable Finance has established a regulatory framework to which the financial industry is adapting. Labelling agencies such as LuxFLAG are also having to adapt to these EU standards.

VB: ESG, sustainable finance, responsible investment, ethical investment and impact investing remain confused in the minds of many members of the public. Several of LuxFLAG’s own labels appear to overlap. Can the establishment of European and global definitions and rules bring clarity? How does sustainable finance tie in with your own long-standing efforts to develop investor education?

DV: Agreed, there is a lot of terminology in the sustainable finance sphere, and it can be confusing. It’s very important, for example, to distinguish between ESG investing and impact investment. ESG investing involves taking into account ESG factors as well as financial considerations when deciding which companies to invest in – really looking at the entire picture when it comes to a company and what it could look like in the future.

Impact investing is a subset of ESG investing, but goes even further by choosing companies that are actively seeking to make tangible improvements, for instance in the quality of drinking water for communities. Investors usually expect a profit from such a company, but its impact will be as important or even more so for the impact investor.

LuxFLAG has five labels, of which four are impact labels (Microfinance, Environment, Climate and Green Bond) and one ESG label. The difference between the labels is highlighted in the criteria for each label, available on LuxFLAG’s website.

When it comes to sustainable finance, education is really critical for investors to understand the terminology, for example ESG investment versus impact investing. Education about sustainable finance is also very important within the industry itself, given the topic is relatively new for some asset managers and other financial actors. It’s important that sustainable finance is understood throughout an asset manager’s organisation, given there is an impact not only for portfolio management but for the fund accounting, client service, legal and compliance teams, to name but a few.

Sustainability priorities after Covid-19

VB: The Covid-19 pandemic has left economies struggling throughout the world and presented governments with the challenge of stimulating a rebound. How can we expect the coronavirus pandemic to impact sustainability? Is there a risk that sustainability priorities will be put on the back burner? Or is it an opportunity to build ESG criteria into the economic structures of the future?

DV: Covid-19 is also focusing our attention on the ‘S’ in ESG – social issues. In fact it has lifted the lid on issues that already existed in our society but were not recognised by many of us, for instance widespread inequality and unfair labour practices. I’m hopeful that sustainability priorities will be an important part of “building back better” during and after Covid-19.

Europe is certainly trying to keep it on the front burner: for example the European Green Deal, the programme of the current European Commission which is “striving to be the first climate-neutral continent”. There is a will to make the transition just and inclusive for all, especially since climate change clearly impacts more severely communities that suffer from the greatest inequality.

In addition, the EU Action Plan for Sustainable Finance will continue to require financial players to consider and be transparent about environmental and social issues, for instance through the Sustainable Finance Disclosure Regulation. One requirement will be disclosure of ‘principal adverse impacts’ which means’, for example, firms having to disclose whether and how they take environmental, social and governance factors into account in their investment decision-making process, information that must be available on their website.

VB: As the world’s largest hub for cross-border funds, Luxembourg is seeking to carve out a central role in sustainable finance. What key steps has the country taken toward this goal and what does it still have to do?

DV: Sustainable finance has been top on Luxembourg’s agenda for several years as a result a number of public and private initiatives. To mention just a few, Luxembourg has become the first European country to launch a Sustainability Bond Framework.

There’s also the EIB-Luxembourg platform to support investment in climate finance; the International Climate Finance Accelerator, which supports managers in the creation of financial instruments to finance climate action; LuxFLAG labels to add further transparency and credibility to investment products, and the Luxembourg Green Exchange, which facilitates investor choice through green bond listings.

If you’re interested in sustainability, finance, and the funds sector, you should read:

ILA Directors’ Day 2020: Report

The primacy of shareholder value as an overriding corporate priority – propounded by Milton Friedman in 1970 – has led to increased inequality, the erosion of community and environmental degradation, governance expert Jaap Winter told participants at ILA’s – virtual – Directors’ Day event last month. But the wind has changed: the Covid-19 pandemic has contributed to a shift in mindset as companies adopt goals such as environmental and climate protection, as well as embracing social responsibility into their activities and supply chains. ILA members heard how these trends are dovetailing with the digital revolution, the rise of sustainable finance and flexibility in the workplace – and the home office – in a moment of unprecedented change for companies and their boards. Here’s a report we put together as media partners for ILA‘s event.

Governance and society: From the decline of shareholder primacy to living with Covid-19

The past year has changed much in the business world, from working patterns and relationships with technology to the steady emergence of sustainability as an existential issue for companies.

The ILA Directors’ Day on November 23 encompassed many of these trends, itself transformed into an online event, as with so many others in 2020. But in many respects, participants heard, Covid-19 has lent impetus, urgency and visibility to current trends rather than overthrowing the existing order.

Take social responsibility, long overlooked as a significant corporate imperative. In 2020, it  emerged as a major boardroom concern as the ‘S’ in ESG, an acronym spreading faster than ever from ethical investment niches to the economic mainstream.

Not coincidentally, its new prominence coincides with an apparently terminal crisis for the dominant paradigm of Western capitalism for the past half-century – maximising shareholder value – according to academic and corporate governance expert Jaap Winter.

“Shareholder value, as propounded by Milton Friedman in 1970, became no longer an outcome of business processes but corporations’ sole objective,” he said. “It led to remuneration based on targets for revenue and profitability, focused on the short term to enable managers to qualify for bonuses and exercise stock options. Everything on corporate balance sheets becomes transactional assets with a price; costs paid by staff, communities, the environment and climate are externalities that are not the company’s responsibility.”

Long-term focus

This, Winter argues, has led inexorably to increased inequality, the erosion of community and environmental degradation.

But even before the pandemic, a change of heart was underway, exemplified by the adoption in August 2019 of a new standard of corporate responsibility by the US Business Roundtable to supersede shareholder primacy, embracing the principles of delivering value to customers, investing in employees, dealing fairly with suppliers, supporting local communities and the environment, and focusing on the long term in generating value for shareholders.

Already, many companies, especially in Europe, have incorporated the United Nations’ Sustainable Development Goals into their strategies, Winter says, but the process of realigning corporate aims with the wider needs of society has taken a step forward with Covid-19. Suddenly the state is no longer a brake on business success and profit but the source of funding that has kept companies alive.

At the same time, companies have embraced goals that benefit society rather than simply boost the bottom line, turning their factories to manufacturing respirators or protective equipment and laboratories to vaccine development.

Winter argues that the challenges of 2020 have reawakened the best and most useful corporate attributes, which had been curbed by the short-term focus on shareholder value: the kind of risk-taking, creativity and energy (rewarded by profit) that governments struggle to deliver on their own: “Business was needed to resolve the crisis – to solve problems rather than create them.”

Higher standards

He acknowledges that the idea of serving a broader array of stakeholders has its critics, who complain it confuses companies about their goals and risks cutting them off from shareholders, their source of funding. And he acknowledges that well-meaning measures such as elements of the Dutch corporate governance code have been used to ward off unwelcome bidders rather than pursue long-term value creation.

Winter applauds initiatives such as public benefit corporations, corporate purpose provisions in France’s Loi PACTE, and B Corporation certification for businesses that meet the highest standards of socialand environmental performance, public transparency and legal accountability to balance profit and purpose.

“I believe there should be general base standards of social responsibility for all, plus legal forms for those that want to go further,” he said.

The Netherlands is proposing that the duties of corporate officers should be extended to ensuring that companies act as responsible corporate citizens. Yet that and similar approaches raise questions about how this interacts with the power of shareholders’ meetings to pass resolutions, individual liability, and the design of remuneration to provide incentives to meet these goals.

“There is a need to reintegrate business and society, which have been separated by the fully-fledged shareholder primacy obligation,” Winter said. But he cautioned: “The financial industry still has a problem with indifference on the part of some institutional investors that remain focused on returns and liquidity, which diminishes their ESG impact.”

ILA’s Carine Feipel and John Li discuss governance hot topics for financial sector

Technology and governance

Another disruptive trend in corporate organisation and strategy that has been accelerated by the pandemic: the integration of digital innovation into almost every aspect of companies’ activities.

Martha Crawford, dean of the Jack Welch College of Business & Technology at Sacred Heart University in Fairfield, Connecticut, says that in the industrial field, digitalisation is a logical part of process improvement, leading to less waste and more profit.

However, it goes much further, she argues: making existing products smarter and more compelling, using data itself as a product or service, and developing completely new products and services, for example through mass customisation.

“When things undergo digital transformation, they take on the properties predicted by Moore’s Law [originally formulated to describe the inverse relationship over time of computing power and its cost],” she said. “This has consequences, including the emergence of alternative business models, the redefinition of customer relationships and experience and the convergence of business verticals.”

These trends raise new challenges regarding corporate responsibility, Crawford says, and how companies deal with risk. She notes from personal experience that executives and directors are prone to overestimate short-term business risks while underplaying technology risks, such as data leaks and ransomware attacks – until their company becomes a victim.

“Before we were attacked, it was hard to get the attention of the audit committee, which was mainly focused on financial issues,” she said. “But afterwards, we implemented a three-year cyber-security plan in three months.”

Should it be mandatory for companies to have digital expertise on the board? It’s a good idea, Crawford advises.

But she says that in time, all business leaders will need to have much more digital knowledge than their counterparts did in the 20th century – “and when millennials reach the C-suite, that knowledge will be very much greater.”

Sustainable finance opportunity

Boards also must grapple with sustainability issues that in Europe, at least, are increasingly being enforced by legislative requirements – for instance, investment funds have until March 10 next year to comply with the EU’s Sustainable Finance Disclosure Regulation.

However, since the European Commission has fallen behind on setting out in detail how financial institutions should report on the sustainability risks of investment products, they can only follow the legislation’s high-level principles, with the requirement that disclosures should be clear, concise and not misleading.

Green or sustainable fund labels such as those awarded by Luxembourg’s LuxFLAG can help, argues fund director Jane Wilkinson. “The key questions for directors are what the asset manager’s overall strategy is, how it should embrace sustainability issues and how this should be rolled out to individual funds.”

But PwC Luxembourg partner Nathalie Dogniez noted: “We can capitalise on Europe’s advance over the rest of the world. It is an opportunity for asset managers with sustainability credentials in other markets.”

Covid-19’s long-term impact

The Covid-19 pandemic has demonstrated that companies and their boards can be adaptable, adopting different processes and models, such as working offsite.

From left to right: Karen Wauters, Luc Frieden, Monique Bachner

But Chamber of Commerce chairman and former finance minister Luc Frieden says companies are still in the process of learning the lessons. “Reprioritisation is important in every crisis,” he said. “Bringing people together, even if they can’t meet physically, has become vital.”

However, he says making a success of remote board meetings is more complex than it might at first appear: “From a technological point of view, the equipment and infrastructure worked so the content of meeting was good. A screen community works if you already know people, but we miss the informal gatherings before and after meetings.”

Frieden says he would retain some of the new habits and practices, such as taking decisions by circular and e-mail, in the post-pandemic world.

But many of the consequences will be here for a long time, he warns. “Luxembourg’s steel crisis took 10 years to resolve; the global financial crisis needed five years. Even if the disease is under control soon, it will take four or five years before things are back to normal; repeated lockdowns and supply chain disruption will have an ongoing economic and psychological impact.

“In the medium and long term, companies may need to find new markets and use different tools. For now, many people are stressed and focused on the immediate future, but boards need to focus on planning for changes over the next five years.”

ALFI PE & RE Conference 2020: Report

The Covid-19 pandemic and persistent economic uncertainty have not dented Luxembourg’s continuing growth as a centre for alternative investments, especially private equity, real estate and private debt, according to speakers at ALFI‘s PE & RE Conference 2020. The capital needs of the economic recovery are likely to give the sector a further boost in the coming months and years, while industry members point to its early commitment to sustainability and reduction of carbon emissions. Meanwhile the range of activities carried out in Luxembourg is growing in response to substance requirements – but also the jurisdiction’s deep pool of fund services expertise. Here’s a report we put together as media partners for ALFI‘s event.

Industry celebrates Luxembourg’s expanding role as alternatives hub

The economic and social disruption stemming from the Covid-19 pandemic has done little to slow the growth of Luxembourg as a hub for international alternative investment business, according to speakers at ALFI’s – virtual – annual PE & RE Conference on December 1 and 2.

Corinne Lamesch speaking at the ALFI conference
ALFI chairperson Corinne Lamesch

The 500 registered attendees heard ALFI chairperson Corinne Lamesch underline the importance of private equity and real estate to the grand duchy’s financial sector and to the fund industry as a whole in an environment that has if anything boosted demand for private assets. She cited a forecast by specialist data provider Preqin that global alternative fund assets are forecast to reach $14 trillion by 2025, with private equity accounting for $4.9trn, private debt for $1.4trn and real estate for $1.2trn.

“Regulated alternative funds in Luxembourg reached €800bn at the end of September, 17% of total fund assets – but this does not include the asset volume in unregulated funds, for which statistics are difficult to compile,” Lamesch said. A measure of the sector’s impact is the 1,160 reserved alternative investment funds launched since the regime was introduced in 2016, along with 4,320 special limited partnerships, a structure added to the Luxembourg fund toolbox in 2013.

She added: “The pandemic has impacted fundraising and short-term performance, but players are confident, if not bullish, about the long term, especially by comparison with other investment strategies – especially with initiatives underway to open alternative investments to a wider investor base.”

Economic headwinds

Screenshot of Nick Brooks
Nick Brooks, Capital Group

The industry must live with economic headwinds for a few months yet, thanks to the second wave of infection in Europe and the US, according to Nick Brooks, chief economist of London-based private debt, credit and equity manager Intermediate Capital Group. But he said: “We should be moving in the direction of normalcy by the second quarter of 2021 and see a recovery powered by pent-up demand in the second half of the year.”

Brooks argues that private capital has a key role to play in the economic rebound, with a great deal of dry powder available for investment, just as governments are obliged to start cutting back measures to support jobs and businesses at a massive cost as a proportion of GDP. “Many companies have only survived through government-backed loans and direct funding, and there will be great demand for capital later this year,” he said.

The fast-growing private debt market stands to be a prime beneficiary, says Alfonso Erhardt, founding partner of Madrid-based Oquendo Capital. “There has been a huge correction and many business models have been impacted, with sectors such as tourism and airlines particularly suffering.” Not many borrowers have sought renegotiation of terms, he says, but there have been more requests for additional liquidity, and Oquendo has urged firms to take as much state assistance as possible.

Giorgio Medda, group co-CEO at Italy’s Azimut Private Debt, says sustainability issues are increasingly central to the industry. “We benefit from the luxury of being able to cherry-pick business, but private markets are more efficient in implementing ESG considerations,” he said. “We provide a high degree of support to the economy, working with borrowers on sustainable business plans, which comes very naturally to ESG investors.”

Plugged into the data flow

Guest speakers at the ALFI conference
From left to right: Kai Braun, Sarra Huda, Fabrice Coste

Director Sara Huda says the collection and use of data is an increasingly important issue for Carlyle, which now has 40 staff in Luxembourg and over the past five years has seen SPV numbers in the grand duchy grow from 80 to 400 and assets from €5 billion to €20 billion. “We have consolidated data from our portfolio companies in a centralised function, which means Luxembourg is now plugged into the data flow. It is no longer a pure back office; data is not just being collected but interpreted here.”

Her appreciation of the advantages of the jurisdiction is echoed by Thomas Healy, chief operating officer of Swiss asset manager Kieger, which has been managing Luxembourg-domiciled funds since 2009: “Its proximity, language and culture make it ideal to target a continental European investor base. Luxembourg has a strong reputation and robust regulation, but also flexibility and the presence of global service providers. At Kieger, we also take governance and risk management very seriously.”

He also praises the CSSF and service providers for their responsiveness when the firm was merging a group of FCPs with UCITS earlier this year and moving a range of 20 funds to a new depositary and administrator: “We expected delay with these complex processes, but in fact hit all the deadlines.”

Martin Bresson, director of public affairs for industry group Invest Europe, admitted that the public perception of private equity remains “clouded”, pointing to the role of private equity in job creation and arguing: “We are a cornerstone of the European economy, not just a fringe adjunct.” He also complained about “the false dichotomy presented between finance and the real economy, as though they were not connected”.

Introducing pledge funds

A new development in Luxembourg is the establishment of pledge funds, a concept developed in the United States where rather than committing capital to a commingled pool invested at the discretion of the general partner, investors have the right to review each investment before deciding to participate.

Screenshot of Eugene Zhuchenko
Eugene Zhuchenko, ETORE Advisory

“It gives investors the ability to steer portfolio construction in a more coherent way,” said Eugene Zhuchenko, founder of ETORE Advisory, which was involved in the establishment of the first pledge fund structure in the grand duchy. “Sometimes a blind pool fund is not what investors expect. There is a risk of strategy drift, and of opportunistic investments to boost returns that could involve higher risk.”

For managers, says Arjun Infrastructure Partners’ Serkan Bahçeci, pledge funds offer the opportunity to work more closely with investors and gauge their deal appetite, although he acknowledges that it requires they have the resources and time to assess each proposed investment. And Allen & Overy partner Jean-Christian Six notes that it demands the ability to track the exposure of each investor to their particular underlying assets.

Pledge funds promise to become a new addition to Luxembourg’s alternative fund toolbox, which already offers a wide range of options, says Clifford Chance Luxembourg partner Paul Van den Abeele. He notes that whereas historically the jurisdiction was the domicile principally of main fund vehicles, today managers are also using it for securitisation, co-investment, carried interest and sidecar discretionary co-investment vehicles. 

The SFDR as game-changer

US-based global real estate manager Hines has appreciated the options offered by the grand duchy for more than a decade, says tax director for Europe Paul Taylor, noting that the $144 billion group has as many as 30 regulated and unregulated structures and around 150 special-purpose vehicles in Luxembourg. He said: “We have been focused on Luxembourg for a long time because of its flexibility and the quick time to market for unregulated vehicles.”

Next March, the Luxembourg fund industry faces the start of reporting under the EU’s Sustainable Finance Disclosure Regulation. Said Linklaters partner Hermann Beythan: “It is a game-changer that goes to the heart of private equity and real estate – what funds invest in and why. Managers will have to examine not just the impact on their processes but the value of their investments, such as buildings located on a shoreline.”

Fidelity International’s head of EU public policy, Natalie Westerbarkey, says the real estate sector has a wide range of avenues for making its assets more sustainable, including renovation and retrofitting of buildings, tenant engagement and involvement in international industry initiatives. “There is a lot of awareness of environmental and social issues in Europe, but there is scope for improvement elsewhere in the world, especially in Asia,” she said.

Open architecture model

Three speakers at the ALFI conference
From left to right: Claude Niedner, Josephine Andonissamy, Xavier Zaegel

Industry members are also preoccupied by the ongoing European Commission review of the Alternative Investment Fund Managers Directive. Arendt & Medernach partner Claude Niedner argues that the push by the European Securities and Markets Authority for closer regulation of portfolio management delegation to non-EU jurisdictions should not put at risk the global competitiveness of the AIFMD regime: “Do we want to keep an open architecture model, or European funds with European managers for European investors and European assets? We should not try to fix what isn’t broken.”

Screenshot of Jeff Rupp
Jeff Rupp, INREV

At the same time, they are sifting the issues thrown up by the Covid-19 pandemic and the successive economic lockdowns. Jeff Rupp, director of public affairs for industry body INREV, says the pandemic has accelerated existing trends, such as the increasing importance of the logistics sector and rising investor interest in debt funds. But he warned there may be further consequences to come as ‘normality’ returns: “With a surge in public borrowing and pressure on EU countries to raise more revenue, real estate may represent an easy target.”

Sven Olaf Eggers, CEO of Stuttgart-based real asset fund manager AIF, says this year has brought home that digitalisation is not a panacea in itself, but a means to an end. “We need not just data but correct data, and interfaces for the interaction of portfolio and risk management. The fact that high street retailers with apparent sound business models and ratings are going bankrupt demonstrates the need for smarter data.”

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ALFI London Conference 2020: Report

Sustainability is fast-becoming a key focus in asset management. Last week’s ALFI London Conference was full of great online discussions and fascinating insight from speakers on key related topics, from Brexit to fund regulation to fiscal and monetary policy to the impact of Covid-19. Here’s a report we put together as media partners for ALFI‘s event. Take a look at their site to see if you’d be interested in any of their upcoming virtual conferences.

ALFI London Conference banner ad

Shaping the fund industry’s future: Covid-19, sustainability – and Brexit

With negotiations on a future trade deal between the European Union and the UK government seemingly on tenterhooks, Brexit cast an understandable shadow over ALFI’s annual London Conference on November 23, a virtual event that attracted around 1,000 registrations. Speakers such as ALFI chairperson Corinne Lamesch emphasised, however, that the close relationship with Luxembourg’s asset management sector is destined to endure: “We will continue to work together with UK fund sector whatever the outcome of the trade talks.”

The Covid-19 pandemic may have shaken up working patterns, changed the economic environment significantly and influenced investment strategy trends, but so far it has not dented the sector’s positive outlook. Lamesch noted: “Luxembourg’s fund industry has demonstrated its agility and resilience – after an 11% drop in March, assets have rebounded to close to their January record high.”

Graph of net assets under management in Luxembourg funds

Finance minister Pierre Gramegna says Luxembourg has a more interdependent relationship with the UK than other European countries. “Brexit is not on the minds of many EU policymakers, but I am an exception,” he said, noting that Luxembourg has been well placed to help UK financial businesses adapt to the new legal environment: “We have had four years to prepare for the end of passporting and the need for UK institutions to create an EU presence. And we see a trend toward use of Luxembourg law for bonds because it is close to English common law and offers both flexibility and legal certainty.”

Rebuilding bridges

While industry members believe an agreement that will minimise disruption for the financial industry should be possible, they warn that deadlock could lead to a damaging loss of trust. Said Luxembourg for Finance CEO Nicolas Mackel: “The election of Joe Biden is a game-changer tipping the balance toward a Brexit deal, reducing the risk of the UK slamming the door, but the time left for implementation is getting short”.

“A Brexit deal is important to the financial services industry because it will change the atmosphere between Britain and the EU. Without a deal, acrimony could last for a couple of years, and it would be more difficult to rebuild bridges.” Mackel was echoed by Schroders’ head of public policy Sheila Nicholl: “We need trust and co-operation, and without a Brexit deal that will take time to rebuild.”

Chris Cummings, CEO of the UK’s Investment Association, added: “We need a permanent structured dialogue with the EU to share ideas, compare notes, and ensure no unwelcome surprises.” But head of European compliance Christopher Dearie says private equity firm Apollo Management is worried about national differences within the EU that could undermine single market opportunities even for firms which, like Apollo, have established substantial operations in EU jurisdictions to prepare for Brexit.

Overseas Funds Regime

In the meantime, regulators are adapting to the separation of the UK from the EU single market rulebook. Nick Miller, head of asset management supervision at the UK’s Financial Conduct Authority, says the regulator is drawing up an Overseas Funds Regime as the long-term successor to the FCA’s temporary permissions regime to prevent short-term market disruption.

“Our aim is to maintain high standards but to be open to partners in the EU and elsewhere to offer retail funds in the UK,” Miller said. “The onshoring of EU rules will stop because we need to ensure our regulation is appropriate for the UK market. We will develop a UK green taxonomy, which may not be exactly the same as the EU’s, but will target similar outcomes.”

CSSF head of funds supervision Marco Zwick, meanwhile, is focusing on the implementation on March 10 next year of the EU’s Sustainable Finance Disclosure Regulation. “The SFDR will be a big challenge for the sector and for regulators, and everyone will have to move fast. We are defining a fast-track process for prospectus updates, because the EU rules give no leeway on the deadline.”

Tectonic shift toward ESG

SFDR compliance is just one aspect of the challenge facing the asset management industry in incorporating sustainability into its strategies and operations. “We need to show clients we care about sustainability and to translate that into investment decisions,” said Aviva Investors’ global head of product strategy Steven Blackie.

“There has been a tectonic shift toward ESG, which now underpins every investment strategy in a way not seen two years ago, and we’re only scratching the surface.” This could affect the industry in less obvious ways: “As investors demand environmental and social outcomes, this could tip the balance back from passive toward active management.”

Fidelity International CEO Anne Richards points to the problem of a lack of consensus on sustainability standards and definitions. “I’m less worried about greenwashing than about confusion over what constitutes green investment,” she said. “Managers are having to figure out what’s right – for example, some advocate engagement with fossil fuel companies to effect change, while others simply exclude them. We need comparable and consistent criteria and measurable characteristics. At present there are so many different taxonomies – what we need is something that looks like accounting standards.”

Fiduciary duty

Schroders’ head of Europe Karine Szenberg is confident, however, that the trend is unstoppable, and it implies a new role for asset managers. “Sustainability and stewardship are completely interconnected,” she said. “Initially the focus was on governance, but environmental and social impact are now equally important. Today unsustainable businesses and sectors have nowhere to hide.”

That’s reflected in the surge in demand for sustainable products from investors; a recent PwC study forecast that ESG considerations could drive up as much as 50% of all European fund assets by 2025. James Broderick, a board member of the London-based Impact Investing Institute said: “Growth of 30% a year should be an opportunity, although for asset managers that are not ready it represents a threat.”

The shift toward sustainable investment may have been slowed by a narrower definition of fiduciary duty in the UK and US, which excludes non-financial considerations, than in other European countries. But European Investment Bank senior adviser Nancy Saich believes this may be about to change – especially with the change of administration in Washington. “A World Economic Forum report at the beginning of this year found that the biggest global economic risks were all related to the environmental and climate,” she said. “Not to embrace sustainability means ignoring major risks.”

Fund service providers face other changes to the business environment. “Both we and our clients are under pressure on costs, regulation and disruption around data technology,” said BNP Paribas Securities Services managing director Robert van Kerkhoff. According to senior vice-president Eduardo Gramuglia, the pandemic has accelerated strategic changes at State Street Bank International to adapt to new cost imperatives and the evolution of asset classes and products.

Tailor-made offerings

Asset managers, meanwhile, must take into account increasingly differentiated customer needs. Micaela Forelli, head of European distribution at M&G International Investments, says demand can no longer be served by a single fund or range but an ad hoc and niche approach. Amundi business development manager Etienne Lombard added: “Ultra-high net worth individuals with whom you have to listen to their needs – it’s no longer prêt-a-porter but haute couture.”

Independent consultant Peter Grimmett says that in some areas, policymakers need to do a better job. “The industry was very supportive of the European Long Term Investment Fund regime, but what came out was slightly different,” he said. “ELTIFs were to offer regulation and access to retail clients, but the retail rules were tough – so it was easier for asset managers to launch AIFs instead. The basic Pan-European Personal Pension product came with a 1% maximum charge including advice fees, which was very difficult for active asset managers. Changes are needed to make these regimes fit for purpose.”

These developments are taking place just as economic policy fundamentals are undergoing their biggest change in three decades, according to Citi chief economist Arnaud Marès. “The 30-year separation of monetary and fiscal policy is probably over,” he told conference participants. “Economies will continue to need huge government support until a Covid-19 vaccine is rolled out.”

Meanwhile, monetary policy is no longer working as it’s supposed to, he says; even with interest rates at zero, or negative rates, people are convinced they need to save rather than spend. “In addition, governments that have borrowed hundreds of billions of euros need to know that central bank support will not be suddenly taken away. In this new world, central banks have no choice but to ensure interest rates and yields will remain close to zero for a very long time.”

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ALFI Digi Pulse Switzerland 2020: Report

From sustainability to cross-border pensions and data governance, last week’s Digi Pulse Switzerland virtual event covered key issues for the asset management industry. Here’s a recap we put together as media partners for ALFI‘s event. Take a look at their site to see if you’d be interested in any of their upcoming virtual conferences.

Swiss asset managers see new opportunities in Luxembourg fund toolbox

Amid an environment of economic, financial, political and medical uncertainty unprecedented in the modern era, Swiss asset managers targeting European or global investors continue to rely on Luxembourg as an investment fund hub attuned to their needs and constantly evolving to meet the requirements of the international marketplace, according to speakers at the ALFI Digi Pulse Switzerland on November 18.

Event chairman Daniel Siepmann, CEO of Credit Suisse Fund Services (Luxembourg), told participants in the annual industry gathering from two of Europe’s (and the world’s) most important international financial centres – transformed from a face-to-face roadshow to an online meeting reflecting the constraints of the Covid-19 pandemic – that Swiss asset managers already account for 14% of Luxembourg’s fund assets, a total of € 630 bn in 2,745 funds run by 157 managers.

Siepman says the grand duchy’s appeal to the Swiss investment industry lies in its wide product palette, including both unregulated and highly regulated vehicles. They encompass recent additions such as reserved alternative investment funds (RAIFs), which offer managers exceptional flexibility and rapid time to market, as well as special limited partnerships, designed to offer the same legal characteristics as US and UK partnership structures, and of which more than 4,000 have been established since 2017.

Future ambitions

Members of ALFI’s strategic advisory board say the organisation has no intention of resting on its laurels and is pressing ahead with ambitious goals for the next five years. Steven Libby, EMEA asset and wealth management leader at PwC Luxembourg, says the need for longterm European cross-border savings and pensions solutions has been underlined by the pandemic. The time may finally have come for the Pan-European Personal Pension, a voluntary complementary pension product offering an alternative to national retirement savings schemes.

LuxFLAG chairwoman Denise Voss says the Build Back Better concept for recovery from the pandemic offers an enhanced opportunity for Europe’s asset management industry to demonstrate its value not only by expanding the scope of sustainable products but boosting education on sustainable finance and investing for members of the sector as well as the public. “The next generation will expect ESG products to be the default,” she said, “and so will future potential recruits to the asset management industry.”

Capital Group’s Jean-Marc Goy says UCITS have been recognised globally as a label of strong investor protection for more than three decades, becoming one of the biggest success stories of the EU single market for financial services. Meanwhile, the Alternative Investment Fund Managers Directive has paved the way for Luxembourg to become a global private equity hub, noted EY’s private equity fund leader for EMEA and India, Alain Kinsch, “thanks to its constantly enhanced toolbox, and as a cost-effective place to do business thanks to a deep ecosystem, talent and best practice across the value chain”.

Asset managers and stewardship

The European Securities and Markets Authority is pushing for the convergence of rules governing UCITS and alternative investment funds, a process that is already underway, says Ilias Georgopoulos, CEO of Credit Suisse’s MultiConcept Fund Management. However, he cautions against ESMA’s call for tighter rules on cross-border delegation of asset management functions – ostensibly because of Brexit, but a shift that would also affect groups in Switzerland and the United States. “Luxembourg has 30 years of delegation experience,” Georgopoulos said. “Don’t change things that work.”

GAM’s head of continental Europe Martin Jufer highlights the broader role of asset managers in society. “The growth of responsible investment reflects investor demand and represents an opportunity for asset managers to embrace a stewardship role on their behalf,” he said. “But it requires a huge commitment starting with boards, people and processes to make sustainability an integral part of strategy, including governance issues such as engagement with companies and proxy voting.”

Head of products Michael Kehl says UBS Asset Management is moving ESG integration into everything it does and all its products: “It is embedded in almost every active investment decision.” Arguing that the challenge of the EU’s Sustainable Finance Action Plan is to find the right balance between establishing common standards and encouraging innovation, Kehl says Switzerland is likely to follow the EU blueprint closely, especially given the growing political strength of the country’s Green Party.

Regulation and compliance

Luxembourg’s financial regulator is playing an important role, says Arendt & Medernach partner Henning Schwabe. He said: “The CSSF is helping the industry prepare for application of the EU’s Sustainable Finance Disclosure Regulation on March 10 next year, putting in place a fast-track procedure to get prospectuses updated in time.” He also cites the regulator’s measures to ease strain on asset managers during the pandemic, including use of swing pricing, authorisation of digital signatures and flexible over reporting deadlines.

The CSSF is also stepping up its requirements for effective anti-money laundering controls, notes Elvinger Hoss Prussen partner Gast Juncker. “Following money laundering scandals, it is demanding that AML risks are addressed not only at distribution level but in terms of assets, counterparties and delegates, and non-compliance will be met with stronger enforcement,” he said.

The intertwining of sustainable investment and post-pandemic economic recovery should give further impetus to Luxembourg’s role as a centre for private equity and infrastructure investment, says EY senior audit manager Stefan Rech. “Renewable energy is a key focus, with compound growth of installed capacity averaging 8.5% annually since 2010,” he said. As coal consumption declines and transmission and storage technology improves, renewables’ share of global power generation is forecast to increase from 15% to 25% over the next 10 to 15 years.

Transparency, governance and data

Partners Group’s head of infrastructure business development Robert-Jan Bakker says that together with electricity generation, transport and the built environment offer pathways to tackle 75% of carbon emissions. “For the remaining 25%, we are looking at carbon capture and storage, particular in the US, which has clusters of big emitters, regulatory pressure and natural underground storage capacity,” he said.

Northern Trust EMEA product manager Stuart Lawson argues that recent experience has demonstrated the critical importance of ensuring investors understand the liquidity characteristics of such investments. “The challenge is to ensure that the structure of a fund is aligned with investor expectations and the nature of the assets,” he said. “For instance, renewable energy offers steady and progressively increasing income, but it is very illiquid.”

This comes back to transparency, but also governance, Lawson says – and the critical importance of data. He said: “People active in governance need to be qualified, and based in the location where the fund is regulated; decisions need to be properly documented, and checks and balances incorporated into the investment process. Operating models must be redesigned and re-engineered around data and data strategy; reporting must be reliable, comparable across the industry and consistent with its standards.”

As the global economy gradually emerges from the slump precipitated by Covid-19, ALFI Digi Pulse Switzerland participants agree that the symbiosis of the country’s asset management industry with Luxembourg’s fund structuring, servicing and distribution capabilities will be more important than ever.

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Don’t Be Another ‘Greenwasher’

Window cleaner using a sponge to wash a window with clear blue sky

The term ‘greenwashing’ was first coined in 1986 to describe outlandish and unsubstantiated claims and promises that corporations were spreading about themselves.

In brief, greenwashing describes disinformation efforts to convince audiences that an organisation is doing more to protect the environment than in reality, presenting an inaccurate image of environmental responsibility.

Now, 35 years later, greenwashing has accelerated into a widespread and prevalent issue plaguing virtually every industry. Many corporations are willing to bend the truth — and in some cases lie — in order to con consumers who increasingly question the ecological footprint and impact of companies they patronise.

Greenwashing sells moral values

With belief-driven buying at an all-time high, the ‘green angle’ offers a highly effective marketing opportunity. According to marketing firm Edelman, three out of five consumers’ purchase decisions are significantly impacted by an organisation’s social or political stance. This lines up with a recent ING report that found 61% of people agree they would be less likely to buy a product if the company was performing poorly on environmental practices.

Indeed, in the current climate, pitching moral values can help a company sell its products and services. Unfortunately, many businesses have found that making such assertions, regardless of their veracity, can propel many consumers over the finish line.

The old adage “doing good is good for business” certainly rings true. However, for many companies, looking like you’re doing good is, well, good enough.

Despite regulations and trade associations policing the issue, it’s still relatively easy to pump illusion over reality. “Many companies have adapted greenwashing tactics which carefully sidestep federal regulations regarding false advertising and work to provide a counter argument for the part of your brain telling you it isn’t worth the potential costs,” warns Giovanni Lopez-Quezada.

How, then, can a company prove reality-based green credentials without looking like just another greenwasher? What can marketers do to showcase their employers’ green initiatives and/or values without appearing to be just another perpetrator of greenwashing?

Be transparent

The public is getting better at spotting the type of wishy-washy language marketers use to make a company or product seem authentic. The answer in this case, is to be honest and transparent.

If you are positioning your company — or even simply a specific initiative or programme — as green, describe openly its full benefits. Moreover, don’t be afraid of exposing aspects of your operations that aren’t so green. In fact, doing so opens the door to discuss how you plan to improve in the future.

While that level of honesty and genuineness with customers traditionally has been considered a liability in business, consumers today appreciate and reward transparency and accountability, attributes that help build a stronger, more loyal bond with clients.

Be warned, however: This degree of transparency requires accuracy. In the era of social media, digital audiences are quick to ferret out misinformation and just one or two slip-ups — even if accidental or unintentional — can tarnish a brand’s credibility.

Ditto cherry-picking information in a way that could convey a false impression.

Instead, focus on making strong statements you can support. Any claims should be provable. And avoid using a self-aggrandising tone at all costs.

Impact is the enemy of greenwashing

Greenwashing 101: Companies too often are laser-focused on showing the world that they are indeed green-friendly. The marketing campaign becomes the most important element.

Rather, to communicate a message about sustainability aspects of your products or services, showcase real, substantial impact.

Look for data points — tangible facts — that showcase what has actually been achieved. Rather than publicising what you’re company has done or is doing to help the environment (and how amazing you are), focus instead on the programme, initiative and/or its positive impact.

Show (don’t tell) consumers why the issue is important to your company — and why they should care. Then use those data points to reinforce your assertions.

As Business for Social Responsibility (BSR), a non-profit whose mission is to “build a just and sustainable world,” writes in its Understanding and Preventing Greenwash report, “if the initiative is a small portion of the company’s efforts done for the sake of reputation…it’s greenwash.”

BSR suggests asking the following questions before embarking on a marketing campaign in order to ensure the impact comes first:

Is the topic of your message a significant environmental achievement?

As BSR warns, “if you reach the conclusion that the initiative is not making a significant change, don’t communicate it, or at least hone the scope of your message. Chances are people will see through inflated words and you will risk losing trust. Take a step back and develop an impactful initiative that is worthy of communication.”

Is the issue you are addressing material to your business?

If your impact doesn’t align with your core business, it may not necessarily matter to your stakeholders. Plus, if you are getting involved in environmental issues that don’t relate to your core business, it can come off as an attempt to distract from the primary environmental issues that are associated with your company.

Have you invested significant resources? Have you spent more money on the marketing than the activity?

This should be obvious. If you haven’t invested substantial resources in the green initiative or activity, it’s likely it will fail to achieve an environmental success worth sharing. In other words, focus on impact, not reputation.

Have you already achieved the results you are claiming?

At times, it’s better not to talk about what you are planning to do or what your green initiative or eco-friendly product/service will achieve. Wait for measurable, tangible results, or at least change your messaging so that it shines the spotlight on what has already been achieved.

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EIB’s Hakan Lucius: “Agreeing on a common language about sustainable finance is key”

Headshot of sustainable finance expert Dr. Hakan Lucius, European Investment Bank's Head of Corporate Responsibility

Long before sustainability and sustainable finance were on, well, everyone’s minds, Hakan Lucius was pounding the drum for the world to pay attention.

Over his two decades in the field – and now in his current role as Head of Corporate Responsibility at the European Investment Bank (a new client of VitalBriefing’s services in Sustainable Finance), Dr. Lucius has amassed a stellar background as a leading authority in the field, structuring billions in investments, loans and equity for multinational teams negotiating sustainable initiatives with governments, businesses and civic organisations.

In this interview with VitalBriefing CEO David Schrieberg, he discusses the EIB’s role as a global sustainability leader and the challenges in a field that is catching fire at a time the world never needed it more.

What are the key criteria for distinguishing between genuine ESG, green or sustainable financial instruments or products and those whose promoters are seeking to jump on the bandwagon?

It is important to look behind the headlines, into the actual activities, standards and appraisal processes. The European Investment Bank (EIB) is the world’s largest multilateral lender.  Ensuring that sustainability is embedded in all our work means three things:

  1. A number of activities are excluded from EIB lending because they are incompatible with our sustainability objectives.
  2. All projects and investments have to comply with the EIB’s Environmental and Social Principles and Standards to incorporate environmental and social sustainability considerations into our investments.
  3. We perform a separate economic appraisal to assess the cost and benefits of our investment projects to society.

While embedding sustainability into our processes, we are also one of the biggest providers of climate finance. 

We have been Europe’s climate bank for a long time. 2015 was a milestone year in this field, when the EIB Climate Strategy was launched and EIB Climate Action finance had reached a record high of EUR 20.7 billion, representing 27% of overall EIB financing.

Now the EIB has decided to make a quantum leap in its ambition, becoming the EU climate bank. We will stop financing energy projects reliant on fossil fuels and we will increase our ambitions in climate action and environmental sustainability.

Our approach builds on three pillars: The first is to increase our own financing; we are aiming at 50% for climate and environmental sustainability by 2025.

The second pillar is a commitment to support €1 trillion of investment for climate action and environmental sustainability by working with our public and private partners in the decade to 2030.

The third pillar is to align all our activities with the principles and goals of the Paris Agreement starting by the end of this year.

This new ambition will help unlock the massive investments that will be needed for the decarbonisation of our economies. In this regard, the EIB is a central piece in the implementation of the European Green Deal to make Europe the first carbon-neutral continent by 2050.

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How big a problem do you believe greenwashing really is, as opposed to honest confusion or differences between conflicting sets of sustainability criteria?

We put sustainability at the heart of what we do. The ultimate goal of projects and investments financed by the EIB Group is to improve people’s lives by promoting sustainable and inclusive growth within the European Union and beyond. We focus on four priorities areas: innovation and skills, access to finance for smaller businesses, infrastructure and climate and environment.

Being a policy-driven Bank, the EIB appraises and monitors all the projects it finances with regard to their sustainability credentials. We only finance projects that pass our financial and sustainability due diligence.

Appraisal and monitoring ensure that projects comply with the stringent EIB Environmental and Social Standards based on the EU legal framework. In addition, we also measure and publish the carbon footprint of all projects with a significant impact.

On the borrowing side, sustainability plays a major role in our fundraising activities.Two debt products stand out for their very specific sustainability criteria: Climate Awareness Bonds (CABs) and Sustainability Awareness Bonds (SABs).

While CAB proceeds are allocated to projects contributing to climate change mitigation, proceeds from SABs are allocated to projects contributing to environmental and social sustainability objectives beyond climate.

We are subject to an external assurance and we have a methodology which is harmonised with all the multilateral development banks on what can be called green. We report on the allocation of proceeds, transparently listing amounts disbursed to individual investments.

Transparency is key.

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What kind of activities are ‘beyond the pale’ in terms of sustainability? What about fossil fuel energy producers or other carbon emitters investing to reduce their carbon footprint? How should one draw the line?

Firstly, I would like to highlight that we have a new Energy Lending Policy and we are stopping all financing for unabated fossil fuel projects. This means in the energy sector, lending for energy efficiency projects, renewable energy projects and for power distribution and interconnection.

A second aspect is the assessment of our projects. Our sustainability due diligence demonstrates how we ensure sustainability in carrying out our financing.

We support projects in sectors that make a significant contribution to growth, employment, regional cohesion and environmental sustainability in Europe and beyond.

The EIB can only support projects that (a) are eligible, (b) fulfil financial criteria, and (c) meet our separate sustainability due diligence.

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Does the sustainable and responsible investment sector suffer from a lack of universally-recognised criteria and standards? Will the EU’s sustainable finance package fill the gap?

Agreeing on a common language about sustainable finance is key. The EU is taking the lead on defining the term, as well as the subsequent actions.

The EIB Group contributed to the EU Action Plan on Sustainable Finance, it helped develop an EU taxonomy for climate action and other environmentally sustainable economic activities.  It will provide specific technical screening criteria and determine which economic activities can qualify for each environmental objective.

Our contribution to the EU Taxonomy also includes the establishment of an EU Green Bond Standard. This technical work can bring about a significant increase of climate finance.

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Do you believe that refinancing of existing projects or programmes through instruments designated as green or sustainable meets the spirit as well as the letter of ESG investment?

The EIB finances only new projects and does not refinance. We provide funding and expertise for sound, sustainable investment projects in support of EU policy objectives.

We focus on four priority goals: innovation, environment, infrastructure and SMEs with two cross-cutting goals: climate action and cohesion. We support projects that make a significant contribution to growth, employment, regional cohesion and environmental sustainability.

The EIB cannot do it alone, we need private investments. The EIB’s fundamental role is to attract private investors to the projects it finances. This is why current work to make the financial system greener is so important and we are contributing to current initiatives to make this happen.

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How does the EIB strike a balance between the goal to promote sustainability worldwide and the pressing financial and investment needs of loan recipient countries, for example in the exploitation of natural resources or employment/working conditions?

The EIB was created to support economic and social cohesion in Europe. We dedicate at least 30% of our financing in the EU to increase cohesion and this will also support the transition to a sustainable economy.

In the current situation, the EIB is finding solutions for COVID-19, but we should not reduce our commitment toward climate and environmental issues. It is important that one sustainability goal is not pursued at the expense of other goals.

Public financing institutions like the EIB must play a leading role in that regard, facilitating the flow of private capital into sustainable investments at the needed scale globally by supporting the creation of the necessary enabling environment and partnering with the private sector.

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