Insights / 10 May 2021

Crestbridge Luxembourg Anniversary Insight Series - Serious about sustainability

Crestbridge Luxembourg Anniversary Insight Series - Serious about sustainability

In this first instalment in a series reflecting on Crestbridge’s tenth anniversary of being in Luxembourg and looking at key issues pertinent to the international fund community, Luxembourg Managing Director Daniela Klasen-Martin looks at what the future holds for sustainable finance…

Even before Covid-19 came along, sustainable finance, ESG investing, impact investing were all concepts that were gaining traction and appeal, with investors beginning to come to terms with the fact that generating good returns should not be either the entire end game, or at odds with creating a positive impact in some capacity on our planet.

For some years now, for instance, large asset managers have been on something of a journey when it comes to ESG – Larry Fink’s ‘Letter to CEOs’ has become something of benchmark and a wake-up call on the attitudes of managers on ESG.

Today, the ESG industry is calculated to be worth some US$38 trillion, and it’s growing as investors not only accept that ESG as an integral part of investment strategies, but proactively seek out ESG opportunities. Over the course of 2020, in Europe alone, ESG funds increased in total asset size by more than 37% to reach EUR1.2 trillion, according to EFAMA.

Indeed, the pandemic has served to accelerate thinking in this area as investors look to capitalise on the unprecedented, global, shared experience of the past 18 months to reframe their investment perspectives and rebuild based on ‘purpose’.

But of course, the journey does not end there. Actually, we are now only really only starting to get serious about sustainable finance and what it means for the long-term future of the asset management industry.

There are very real challenges on the horizon. Measurement and evaluation is still highly fragmented, leaving managers open to allegations of greenwashing; there is little in the way of standardisation or common benchmarking and reporting across markets; ESG is still highly weighted towards the ‘E’, leaving the ‘S’ and ‘G’ with some ground to make up; and skills across the sector are still really in their infancy, leaving managers poorly resourced to answer questions on ESG with credibility.

As we look forward, sophistication and the professionalisation of the ESG space are now very much the order of the day.

Europe, and Luxembourg in particular as the major funds hub within the EU, is in a relatively advanced place in terms of thinking on ESG compared to the rest of the world. The consequences of the regulations to come, i.e. AIFMD II, the taxonomy and the SFDR regulations, the first phase of which came into place on 10 March this year, are helping to create a more professional framework and environment for facilitating and conducting ESG investment with credibility. The second phase of SFDR is expected to come into play in early 2022.

But even here there are still question marks over the implementation of the regulatory and reporting requirements. Further, while Europe might be ahead of the game, we know that the investment space is increasingly global meaning that other markets risk being left behind or out of kilter. A joined-up response based on collaboration is what will be required if the industry is to achieve its end objective.

Which is why it is pleasing to see asset managers globally making moves to enhance transparency and disclosure around ESG – a recent study by SquareWell Partners found that 32 of the top 50 asset managers in the world have included distinct environmental and social guidelines in their voting policy, up from 19 in 2019.

Further regulation on ESG is due, and this will have impact on the substance and governance requirements for funds, This is something that will help to strengthen the Luxembourg model even further. In fact, as a firm we have built out significantly in the regulatory area of portfolio and risk management in recent years in anticipation of these movements. Most recently we have been actively involved with several working groups, and Crestbridge employees have played a key role in building the guidelines that were published by ALFI back in March. With this hands-on knowledge within our workforce we have been well placed to support our clients as they navigate the complexity of the new SDFR regulations.

However, looking forward, the direction of travel is clear when it comes to regulation around sustainable finance. Those asset managers that do not adapt and proactively address the changing demands of investors and the wider sustainable finance regulatory landscape will get left behind.

The past ten years have shown that the alternative fund industry can adapt successfully to a shifting and disrupted environment, and if we are serious about sustainability, there is a real opportunity now for investors, managers and service providers to demonstrate that innovation and agility once more - to come together and align their priorities to ensure that private equity and other alternatives can demonstrate their added value to the markets and – more importantly – their positive impact on communities around the world.

For more information about Crestbridge’s capabilities in the ESG and sustainable finance space, please contact us.