Insights

Insights / 02 June 2021

Crestbridge Luxembourg Anniversary Insight Series - Governance: the key differentiator

Crestbridge Luxembourg Anniversary Insight Series - Governance: the key differentiator

In this second instalment in a series reflecting on the tenth anniversary of Crestbridge’s Luxembourg office and looking at key issues pertinent to the international fund community, Luxembourg Managing Director Daniela Klasén-Martin looks at how governance is no longer a nice-to-have – it’s a key differentiator in the asset management world…

A lot can happen in a decade.

It’s interesting to reflect that it is now eight years since the AIFMD was introduced, for instance.

Heralded by some as a key move to help protect investors in alternative investment funds in the wake of the global financial crisis, for others it was an expensive and largely ineffective piece of bureaucracy.

Things don’t stand still, of course, and we’re now on to the AIFMD II review – but one thing that AIFMD did bring firmly into the spotlight was the importance of oversight and good governance.

That importance remains today – in fact, over the past eight years, governance has moved increasingly centre stage so that today it is one of the key elements of Luxembourg’s funds platform.

Recognising that investor protection and high quality oversight are integral to its success, Luxembourg’s funds industry has placed huge emphasis on the evolution, focus and development of governance over the past ten years so that today it is one of the more striking features of Luxembourg’s proposition as a funds hub.

Through its Fund Governance Forum, for instance, ALFI takes very seriously its role to promote best practice in matters of fund governance, uphold its Code of Conduct for fund boards and professionals, and raise awareness of the leadership role that boards of directors have in promoting good ethical behaviour, integrity and professionalism.

Today, the Management Company (ManCo) is really the centre of governance in the Luxembourg investment fund world. It is thanks to the governance standards that ManCo providers abide by that good quality alternative funds business continues to flow to Luxembourg.

We’ve also seen huge evolution, however, at the investment fund board level too, as boards have sought to diversify skill sets and bring more holistic and broad knowledge bases to fund entities.

Really over the last ten years, Luxembourg has become a risk management hub, with a commitment to good governance at its very centre – and that has been fundamental to Luxembourg’s success.

Scrutiny

It’s an area that continues to evolve, however, and we are now starting to see further regulation in the substance and governance space providing firms with further opportunity to add value to asset managers and investors.

One area where Crestbridge has invested and built out over recent years, for example, is in the portfolio management area, as we’ve sought to strengthen the overall model we can provide from Luxembourg.

It’s clear that now more than ever, good governance and being able to stand up to public scrutiny is absolutely vital, as we look to rebuild economies and communities in the wake of the biggest single global disruptive event of a generation – a view echoed by the OECD.

If stakeholders – governments, policy makers, regulators, the media and the wider public – are to have trust and faith in the asset management space, then governance is what will deliver it.

We are seeing this already in the ESG space – an area where Europe is already advanced compared to other global markets. The framework developed around ESG in the EU is robust and strict, and we are now in the thick of implementing it – the new Sustainable Finance Disclosure Regulation (SFDR) rules came into play only a couple of months ago as the first step in introducing that framework and have good governance at their heart.

It should undoubtedly be an advantage for Luxembourg to have this framework in place as calls for standardized and recognised benchmarks for ESG reporting and disclosure grow louder, ESG products become more sophisticated and investors demand greater reassurances around greenwashing.

We can expect the weight attached to governance to grow in other areas over the coming years too – as investors and managers need, for instance, to demonstrate substance; their ability to fight financial crime; their commitment to ethical behaviours; their diversity and inclusion strategies; their community impact; or their exposure to cyber risk.

The PwC Luxembourg Fund Governance Survey, published in January this year, for example, highlights that alongside ESG, cybersecurity and board diversity are set to be increasingly important governance issue for boards to reflect on over the coming years.

The overall picture of what governance looks like is set to be an increasingly important question for fund professionals looking forward – and not a question reserved just for funds boards either. It is a complex issue and an evolving concept that filters right through the culture of an organization, to add weight to relationships, support strategic ambitions and ultimately gives a firm its licence to operate.

The past ten years have shown that the alternative fund industry can adapt successfully to a shifting and disrupted environment. Those that can demonstrate an enlightened understanding of the importance of governance and appreciate the value it delivers as a sophisticated, cultural dynamic and not just a tick box exercise, will be the ones that lead the way. The evidence is that Luxembourg is starting from a very good position to embrace governance as a key differentiator.

For more information about Crestbridge’s capabilities in the governance space, click here