Banks in the Benelux are adopting Article 9 fund of funds to offer retail clients unlisted impact investments, despite concerns over high costs.
Laws and regulations make it difficult for parties to offer unlisted impact investments to retail clients. Banks in the Benelux see a solution in Article 9 funds of funds. “Customers are actually not waiting for it because of the high costs, but a fund of funds is desperately needed,” says Jan Willem Hofland, head of investment sales at Abn Amro MeesPierson.
ING, Triodos, and ABN Amro, among others, are opting for a fund-of-funds structure to still allow customers to invest the asset class “for which SFDR 9 was conceived,” according to Hofland. He mentions that customers are not actually waiting for a fund of funds because of the high costs. “Only if there is no other way, we opt for this structure.” For this reason, the bank only has one ‘9 fund of funds’ for alternatives, the Privium Sustainable Alternatives Investment Fund, with a size of around one billion euros. For equities and bonds, there are other ways to enable impact investing.
Structure
Hofland explains that legislation dictates that alternative impact projects cannot be offered directly to retail customers, but only indirectly through a fund of funds. “So we desperately need the fund of funds structure.” An additional advantage of this structure, however, is that investors have an immediate diversified portfolio. Abn Amro’s fund includes some thirty projects, aimed at financing wind turbines and student loans in Africa, among others. However, the focus is on microfinance and renewable energy. “These are typically the projects for which SFDR 9 was set up.” The range of alternative impact projects is “huge,” according to Abn Amro’s expert.
A major challenge in putting together and developing a 9 fund of funds, according to the bank, is proper due diligence. “You cannot just step into a wind farm in Kenya without knowing who is behind the project and how the financing structure is arranged. Reporting needs to be in good order and for that, you need data.”
“It is important to show the customer the result of their investment in this fund. Ultimately, they want to know how much water has been saved or how many people distanced from the labour market have been helped,” Hofland adds.
Rising demand
Meanwhile, more and more large banks in the Benelux are opting for this Article 9 fund of funds, Columbia Threadneedle observes. “The Benelux is a region where investors are open to innovation and new strategies,” says Katherine Haesaerts, responsible for wholesale Benelux at Columbia Threadneedle. “At the same time, we see a high demand for impact investing in this region. It is therefore no surprise that it is the wholesale banks in the Benelux that are taking the first steps with the launch of Article 9 funds of funds.”
The demand for green investing is certainly not lacking, according to recent Morningstar figures. In the second quarter of this year, assets under management in Article 8 and 9 funds rose past the five thousand billion euro milestone for the first time. Around a hundred and eighty funds went from 6 to 8 and only six names fell from 9 to 8. “Inflows into 8 funds were somewhat under pressure in recent months, while interest in 9 funds proved resilient,” Haesaerts comments.
Early adoption
Benelux banks are early adopters, according to Michaela Jackson, responsible for Columbia Threadneedle’s distribution channels. The supply of SRIs is growing, partly thanks to the emergence of new strategies, such as Article 9 funds of funds. Today, the limited diversity within SFDR 9 funds is still often cited by investors as a reason not to opt for the highest sustainability category. With 8 funds, it is already becoming easier to diversify across asset classes, geography, and sectors.
“A broad range is needed to meet clients’ different sustainability needs,” Jackson argues.
Haesaerts sees an increasing number of Article 9 fund of funds, but the total number is still limited. “It is a start-up trend; the SFDR regulations are also still relatively new. Banks are showing courage as early adopters by launching the first SFDR 9 fund of funds.”