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An ESG strategy is vital to attract European investors

15 July 2021

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In the second event in our Private Funds Industry Live series, our panellists demystified the operational challenges of running a fund in Europe and highlighted the central role of ESG in European investors’ decision-making

Private capital managers setting up a fund in Europe would be wise to take heed of the growing importance of the environmental, social and governance (ESG) agenda.

European investors are increasingly expecting ESG to be interwoven into a fund manager’s investment decisions and business model, according to Maelle Lenaers, Head of Luxembourg AIFM at Intertrust Group.

Speaking on the panel at the second in our series of Private Funds Industry Live events, Maelle said: “ESG is becoming more and more important for European investors. They’re integrating ESG criteria into their decision-making processes, to better understand the funds and the companies they’re investing in.”

“They are really beginning to expect asset managers to also integrate ESG criteria into their investment decisions and their target operating models as well. If you want to grow your business and continue to attract investors, please ensure you integrate ESG into your business model,” she added.

SFDR: how do the new rules work?

New ESG reporting rules that will come in force in 2022 aim to increase transparency for investors.

Earlier this year, under the first part of the Sustainable Finance Disclosure Regulation (SFDR), existing investment funds were required to decide if they would qualify as an “article 6” fund, one that makes no ESG claims; an “article 8” light green fund; or “article 9” dark green fund. This labelling will have an impact for the ESG reporting requirements which become applicable from January 2022.

Maelle said: “In the future, we see that more and more asset managers plan to launch article 8 or article 9 funds, really focusing on one ESG strategy, such as climate change or renewable energy.”

Andrew O’Callaghan, Global Advisory Leader at PwC, who was also on the panel, said: “It isn’t just environmental factors that are important, large investors are increasingly asking questions around social and governance. How strong is the governance around the investment management firm? Be prepared for that conversation.”

But he pointed out managers should view it as an opportunity to find new investors and investment opportunities.

Andrew said: “What we’re seeing increasingly is that the European Union, the European Commission and the countries outside the EU – so UK and Switzerland – are very active in seeking to allocate private capital into renewable energy projects, into infrastructure and so on. And this is creating great opportunities.”

How Brexit has driven operations to Ireland

Brexit arguably added to the operational challenges of running a fund in Europe and managers are still grappling with the impact it has had on the industry’s landscape. The fact that the UK, the largest financial centre in Europe, is now outside the European Union has lasting implications for where fund managers locate their operations in Europe.

UK alternative investment fund managers (AIFM) are no longer entitled to use the AIFM marketing passport, which enables fund managers to reach all EU markets with a single notification filed to the regulator.

Andrew said: “We estimate that 140 asset management firms have chosen Ireland as their EU hub for operations post-Brexit. The UK remains critical to these businesses and the ability to delegate back to London or Edinburgh, for example, is very important. Ireland’s position as an English-speaking EU country, with a strong fund industry and a Common Travel Area with the UK, is becoming an increasingly important component in the overall European industry.

“In this context, it is very important to ensure you have sufficient substance in Ireland, within the EU, to meet the regulatory framework,” he added.

The advantages of outsourcing to a third-party AIFM

When looking to set up a fund in Europe, a US fund manager must first decide on the target investors and the domicile. Once these have been determined, they will need to consider what functions they want to outsource and who will be their service providers.

Andrew said: “You may look to outsource some management functions to an AIFM. We’re seeing that increasingly being a popular choice to minimise costs.”

A manager operating a fund under the Alternative Investment Fund Managers Directive (AIFMD) will also need to appoint an independent depositary who oversees the safeguarding of assets and may also appoint a third-party fund administrator to ensure investor information and reporting is done correctly.

Maelle said: “Fund managers are looking for a one-stop shop solution where they can find all the services they need under one roof, together with experts who know and understand the regulatory requirements, all provided in a cost-competitive package.

“You leave the service providers to take care of the regulatory burden, while you focus on your core competencies, which are finding the right investors and the right investments,” she added.

Conduct due diligence when picking your service providers

It is crucial to ensure that your chosen service provider understands your fund project and your investment strategy, according to Maelle.

She recommended requesting a demonstration of the reporting tool and sample reports.

She said: “Most service providers would be keen to organise those sessions with you.

“We may provide a lot of educational content before launching a fund. That’s greatly appreciated by US asset managers launching their first fund in Europe as they wish to become more familiar with the relevant European regulations and reporting,” she said.

“We’re there to assist them and to explain what needs to be done,” she added.

Why Intertrust Group?

  • Regulatory and compliance services to ensure you meet your local and global regulatory needs
  • Help with navigating the complexity of reporting requirements
  • Reliable and comprehensive third-party AIFM Management Company services
  • State of the art technology, consisting of proprietary and leading vendor technology
  • Depositary services available across six key European hubs