Alarmed efforts by European green and microfinance fund providers, led by Dutch firms Triodos and ASN, to get the European Commission to rectify what looks like an omission in its proposed investment fund legislation risk being dismissed as «small beer» and may be overlooked. “We have to keep making noise.”
One line in the voluminous EU bill to clean up and tighten the regulations for alternative investment funds, known as AIFMD II, is painful. Article 16, paragraph 1a: a sentence stipulating that alternative funds that invest more than 60 percent in direct loans become closed-end. If this line is not adjusted, it will become difficult to offer impact investments to retail investors. The European Parliament’s Economic Affairs committee is due to vote on this proposal in July.
The text was likely drafted with an intention to keep funds that trade in loans without a banking licence, also known as shadow banks, at bay from private individuals. If endorsed by lawmakers, it could spell the end of open-end green funds and impact funds that invest in green projects and private loans for green entrepreneurs.
If they become closed end, banks will probably no longer offer these funds to private customers. Customers will not be able to exit easily, while an important rule for banks is that non-professional investors should always have access to their assets.
Since November, various fund houses have been waging war at national and European level against this sentence, which has caused them to hold their breath. ASN Impact Investors previously spoke of “a death blow”. Triodos IM last month called on the sector to sign a petition. In the meantime, talks were held with the European Commission, interest groups Dufas and Eurosif, and most recently with members of parliament, in which Dutch ASN and Triodos called on their peers in other parts of Europe to do the same.
‘Genuine omission’
The aftertaste of all these talks was roughly the same. “It must be a genuine omission,” said Hadewych Kuiper, managing director at Triodos Investment Management. “It appears like something the Commission has overlooked amid the turmoil around shadow banking. Whoever we speak to, everyone has sympathy for our story,” she said.
The solution is not as simple as “just amending” the bill, she said. “Actually, our concern is not so much the will to amend it in terms of content. Our concern is a practical one: it is one line in a very large legislative text that has no priority because it deals with a small piece of the market: 20 to 30 billion euros against a total fund industry of 15 trillion.”
And there is the oblivion risk, the risk that this will be forgotten. “At the end of a parliamentary session there is always a trade-off and a point can just be taken off the table. That is why we have to keep making noise. We have distributed a petition now, we will do the same in the autumn. If it stays on the table, I am hopeful that a solution will be found. We have to stay awake.”
Glued to the screen
The extent to which the “noise” has been heard in Europe should become apparent from the amendments arising from this week’s parliamentary meetings. “Since Monday afternoon we have been glued to our screens. What will the parliamentarians say? We are going to follow that up with the presentation of the petition, to keep the issue warm until the deadline for the amendments at the end of June. And we’ll do that again when the vote comes in September.”
Asked about a plan B, Kuiper said Triodos is not preparing for an actual adoption of the bill, other than taking a mental look at the scenarios. “Providing fewer loans is not an option; these funds provide loans. Returning to a percentage below 60 percent means investing the rest in cash or riskier categories? That doesn’t fit the risk profile.”
Excluding private investors
Converting the fund to a closed-end fund is possible, but that would exclude a target group that is important to the fund house: private investors. Kuiper: “Sustainable investment through this type of impact fund would then be reserved for professional investors. We think that is a shame. Moreover, professional investors are often less advanced in making their investments sustainable.”
In that light, she warned against the side effect of the law, namely that private investors will then have to shift to crowdfunding or investment in listed companies for their need for sustainable financing. “Crowdfunding is much less regulated and in the case of corporates, you can forget about direct loans to energy cooperatives or farmers who are committed to regenerative agriculture. That which we want to stimulate then will no longer be possible.”
“Europe advocates sustainable investment, making more conscious choices about where to allocate capital, and involving investors in the transition. Unintentionally, this one little line in the amendment of the law would reduce or hinder the market for impact investing.”
At the end of last year, there was almost 1.2 billion euro in the Triodos Groenfonds and almost 500 million euro in the Triodos Microfinance Fund.
This article originally appeared in Dutch on InvestmentOfficer.nl.