When it comes to enhancing the economic value chain in terms of sustainability and financing the energy transition, the private assets sector is well positioned as an actor that can help deliver the changes that are needed to keep growth sustainable, a Luxembourg panel on net-zero investments was told on Wednesday.
Day two at the Private Assets Conference of Alfi, the Luxembourg Association of the Fund Industry, saw an in-depth debate on sustainability, ESG and net-zero with representatives of a range of actors in the alternative investment sector, including a top real estate investor, a legal specialist and major Alternative Investment Fund Manager.
The panellists took the discussion beyond the widely-discussed challenges that the industry is currently facing, such as the lack of suitable ESG date as it is coming to grips with increasingly stringent requirements under EU regulation such as the Sustainable Finance Disclosure Regulation, or SFDR. Evolving EU regulation initiatives, such as the EU Climate Law which will demand net-zero initiatives to be in place by 2050, were also addressed.
“What we must not forget is the big picture: to commit capital into a sustainable world,” said Veronica Buffoni, managing director at Carne Global. “Yes there are a lot of challenges but also a lot of exciting elements. Private asset managers are privileged, in a bit of a position of influencer. There actually is a lot of value that private asset management can bring to the value chains.”
Real estate is one private investment class that has clearly embraced the need to transform, said Olivier Terrenoir, global head of asset, property management and sustainability investing at Generali Real Estate, a major European real estate investor.
‘Committed to be a pioneer’
“Real estate accounts for 36 percent of greenhouse gas emissions,” Terrenoir said. “When you look at this as a player with 37 billion (euro) in assets, you are committed to be a sort of pioneer in this. It is in our DNA to act. We feel responsible towards our life policy holders.
It is in our culture to act for the climate which now is also becoming clear in the market.”
Generali managed to improve its capacity to implement its decarbonisation strategy by building a new system to collect data on the properties in its portfolio. Such a system is essential, Terrenoir said. “We are managing 2000 assets… you have to collect data. You have to have data. Aggregate tools for data quality, which is necessary for the strategy.”
From a legal point of view, data collection remains a major challenge when it comes to managing sustainable investments, said Caroline Pimpaud, partner at law firm DLA Piper Luxembourg. To comply with the SFDR requirements, investors and fund managers fully depend on sustainability data of the underlying assets.
“Unfortunately most of the time it is quite challenging, with the data that is available, to properly address the applicable regulations,” said Pimpaud, adding that it still is even more challenging when managers use phrases like “impact”, “renewable” or “biodiversity” in the names of their funds.
Fund thresholds
“When the fund uses these names, then internal thresholds apply,” she said. “This is quite a challenging area, with regulation moving a lot and uncertain as to what will be the next step in terms of regulation.”
Across Europe in recent months, it has become clear that national financial supervisors are applying various levels of thresholds, in particular when it concerns Article 9 SFDR funds that aspire an impact in terms of ESG.
Against that backdrop, fund managers across Europe, fearing they will be accused of greenwashing, have decided to lower their SFDR classification of their “dark green” Article 9 funds to “light green” Article 8. Some observers have described this as “the great reclassification”.
“The reasons we have seen several publications step down is that it is really difficult to find a proper benchmark as there always is a lot of public scrutiny on article 9 funds,” Pimpaud said, referring to the greenwashing fears. ”For the time being there still is a bit of a challenge.”
Nevertheless, she, like other panellists, agreed that real change is taking place.
“We have seen real improvement in the way managers determine KPIs, to contribute to the energy transition.That is worth mentioning. The legal framework is not only a burden but also a new opportunity that pushes us towards a net-zero society.”
‘Accountability has to be shared’
Carne’s Buffoni underlined that the responsibility for the current state of ESG and sustainability needs to be shared broadly, including by the financial regulators and lawmakers. “It’s exciting. The private assets industry has a lot of advantages in terms of getting to the ESG goal. Accountability has to be shared equally across the industry, towards the ultimate goal of what we are trying to achieve.”
Generali’s Terrenoire added that as a result of the regulation, investments are becoming more resilient and future proof. “Assets evolve from green premium to brown discounts. I foresee resilience in portfolios. ESG is no longer a wish. It’s a must have. I am very confident that the industry has mobilised now.”