Agefi Luxembourg - novembre 2024

Novembre 2024 27 AGEFI Luxembourg Fonds d’investissement T ransition funds are investment vehi- cles designed to support the trans- formationof assets or sectors that are currentlynot environmentally sus- tainable towards a low-carbon and cli- mate-resilient economy. This is particularly important in the real es- tate sector, which is traditionally one of themost energy-intensive sectors and major contributor of greenhouse gas emissions (1) . Transition real estate funds typically target ex- istingbuildingswithhighpo- tential for energy efficiency improvements and carbon emissions reductions. Such funds could achieve significant sustainable impact by aligning their real es- tate portfolioswith the ParisAgreement and the EUGreenDeal, while also capturing value fromthe renovation andmodernisation of the existingbuilding stock. Article 9 of SFDRand Taxonomy-aligned investments The EU’s Sustainable Finance Disclosure Regulation ( SFDR ) aims to prevent greenwashing and ensure transparency and comparability for investors. How- ever, SFDR also presents certain challenges and un- certainties, especially for transition real estate funds that wish to disclose underArticle 9 of SFDR.Article 9ofSFDRappliestofinancialproductsthathavesus- tainable investment as their objective. Thismeansthat(i)thefundsmustinvestineconomic activitiesthatcontributetoanenvironmentalorsocial objective,(ii)theinvestmentsdonotsignificantlyharm ( DNSH ) any of those objectives, and (iii) the investee companiesfollowgoodgovernancepractices(the Key Parameters ). To ensure that the investments consis- tently alignwith the Key Parameters, Article 9 funds must invest solely in sustainable investments (2) throughoutthelifeofthefund (3) .Thisrequirementhas inadvertently led to a less favourable outcome, either discouragingrealestatetransitionfundsfromdisclos- ing under Article 9 of SFDR or compelling them to downgrade toArticle 8 of SFDR (4) . The European Commission ( EC ) emphasized that Article 9of SFDR“ remains neutral in terms of the prod- uct design, or investing styles, investment tools, strategies or methodologies ” (5) . The EC also reiterated that a sus- tainable investment must meet the Key Parameters andthatSFDRdoesnotprescribeminimumrequire- ments for meeting the Key Parameters. Conse- quently, it is the fund manager’s responsibility to establish their own methodologies to measure the Key Parameters. In the context of a fund referring to a transition plan, the EC specified that a transition plan aiming to achieve that an investment DNSHto anyenvironmentalandsocialobjectivesinthefuture does not qualify such investment as an investment as sustainable (6) . This clarification has reinforced the belief that assets transitioning frombrown to green cannot be consid- ered sustainable investments until the transition is fully achieved. Some argue that the EC’s intention couldbe that amere transitionplan is insufficient. In- stead, fund managers must demonstrate how their transition plans DNSH the other objectives. Other- wise, what would be the purpose of Article 9(3) of SFDR? Article 9(3) of SFDR targets funds aiming at carbon emissions reduction. The EC provided a safe harbor for passive funds tracking a Paris-Aligned Benchmark ( PAB ) or Climate Transition Benchmark ( CTB ) (7) ,whicharedeemedtoinvestinsustainablein- vestments.However,fundswithanactivestrategyor tracking other indices can, according to the EC, dis- closeunderArticle9(3)ofSFDRiftheyclearlyexplain their carbon reduction strategy (8) . This indicates that funds aiming to reduce carbon emissions without trackingabenchmark, couldstill beanArticle9 fund. Sustainable investment includes both sustainable in- vestmentsunderArticle2(17)ofSFDRandtaxonomy- alignedsustainableinvestmentsundertheTaxonomy Regulation. The latter refers to environmentally sus- tainableinvestmentsthatmeetmorestringentcriteria than those under SFDR. Taxonomy-aligned sustain- able investments must (i) substantially contribute to oneofthesixenvironmentalobjectivesdefinedunder Article 9 of theTaxonomyRegulation, (ii)DNSHany of these environmental objectives, (iii) comply with the minimum safeguards (OECD Guidelines for Multinational Enterprises and theUNGuidingprin- ciplesforBusinessandHumanRights),and(iv)com- plywith technical screening criteria ( TSCs ). Unlike sustainable investment under SFDR, fund managers canrelyonTSCtoevaluatewhether anac- tivityisenvironmentallysustainableandDNSHother environmental objectives. TSCs covers some real es- tate transitioning activities, such as renovation of ex- isting buildings or installation, maintenance and repair of renewable energy technologies. However, real estate transition funds face the issue that not the whole real estate asset, may be deemed taxonomy-alignedbutonlytherelated turnover, capital or operational ex- penditures. ESMAGuidelines on funds’ names usingESGor sustainability-related terms (the “Guidelines”) ESMA issued the Guide- lines on 14 May 2024. The Luxembourg regu- lator endorsed them in its Circular 24/863 on 21 October 2024 (9) . The Guidelines aimtoprevent misleading terminology andgreenwashingthrough fund names, by setting out common standards and mini- mum requirements for funds that use ESG or sus- tainability-related terms in their names, such as “transition”. Fundsthatusetransition-relatedtermsintheirnames (i) need tomeet an80%thresholdof investments that are used tomeet environmental or social characteris- ticsorsustainableinvestmentobjectives,(ii)aresubject tomandatoryexclusions(theso-calledCTBexclusions which are less stringent than the PAB exclusions ap- plicable to funds using “environmental” or “sustain- ability”-related terms) and (iii) need to comply with the qualitative criteria whereby the investments ac- counted for in the 80%thresholdshouldbe ona clear andmeasurablepathtosocialorenvironmentaltran- sition (the Qualitative Criteria ). The Guidelines also allow for some flexibility for funds that use environ- mental-related terms in combinationwith transition- related terms in their names, as they can apply the CTB exclusions. This enables funds to invest in fossil fuel companies that are transitioning towards a greener activity, while still using environmental-re- lated terms in their names. One could expect that the Guidelines may inadver- tently lead funds dropping “transition” terms from their names. This shift is not necessarily due to a lack ofESGambitionorunwillingness tomeet theGuide- lines’criteria.Instead,itmaystemfromtheregulatory burden or uncertainty that could derive from the Guidelines. One significant challenge is linked to the interpretation of the CTB exclusions. Specifically, funds are not allowed to invest in companies that benchmark administrators (10) find in violation of the UN Global Compact principles and OECD Guide- lines forMultinational Enterprise. Verifying this exclusion requires access to lists from benchmark administrators, which are not publicly availableandcomeatacostforfundmanagers.There is adebate amongpractitioners aboutwho shouldbe responsible for these assessments. Some believe that benchmark administrators should be understood as the fund managers themselves, who would then maketheassessmentovertheirportfoliocompanies (11) . Until ESMAornational regulators confirmthis inter- pretation, fund managers may view using a transi- tion-related termas a riskrather thananopportunity. TheQualitativeCriteriamayposealegalriskforfund managers.Whenmanagingafundusingatransition- related term, fund managers must demonstrate that theirinvestmentsalignwithscience-basedtargets,de- carbonisation scenarios, or transitionplans. SFDR2.0 Lastyear,theECconsultedonthefunctioningandfu- ture of SFDR. One of the proposals was to revise the current disclosure regime and either convert it into a labellingregimeorreplaceitwithavoluntarylabelling regime.Amongthecategoriesproposedforanewla- belling regime, the EC suggested a distinct category for financial products with a transition focus aiming tobringmeasurableimprovementstothesustainabil- ityprofileoftheassetsinvested,includinginvestments ineconomicactivitiesbecomingtaxonomy-alignedor in transitional economic activities that are taxonomy- aligned,butalsoeconomicactivitiesorportfolioswith credibletargetsand/orplanstodecarbonize.Thispro- posal recognizes the importance of a specific frame- work for transition strategies and the need to incentivize these strategies. Realestatefundsshouldbeattheforefrontofthesus- tainable finance agenda and have a key role to play in transitioning inefficient and high emission prop- erties into efficient and low-emission ones. They havethepotentialtomakeapositiveandmeasurable difference, and tocreatevalue for their investors and society.However, they face challengesunder the ex- isting frameworks. Recent regulatory clarifications aim to address certain issues, but uncertainties re- main, potentially impacting the attractiveness of transition real estate funds. Lisa KLEEMAN, counsel, funds and asset management Dara INGALLO, senior knowledge lawyer, funds and asset management, A&O Shearman 1)Thebuildingssectorisresponsibleforoverathirdofglobalen- ergy consumption and emissions. This encompasses the energy usedintheconstruction,heating,cooling,andlightingofresiden- tial and commercial spaces, aswell as the appliances and equip- mentcontainedwithin.Source:InternationalEnergyAgency 2) with some ancillary investments permitted for liquidityman- agementpurposesorhedging 3)ESAConsolidatedFAQonSFDRandSFDRDelegatedRegu- lationof25July2024. 4)EFAMAMarketInsight,Issue12ofJune2023 5)ESAConsolidatedFAQonSFDRandSFDRDelegatedRegu- lationof25July2024. 6)Ibid. 7)Ibid 8)Ibid 9) Funds set up on or after 21 November 2024 must follow the Guidelines from that date, while funds already existing before thenhaveuntil21May2025. 10)AnEUregisteredorauthorisedpersoncontrollingtheprovi- sionofabenchmark. 11) ESMAGuidelinesonfunds’namesusingESGorsustainability-re- latedterms:keypointsthatsponsorsshouldkeepinmind ,ACECompt- abilité,audit,droitdesaffairesauLuxembourg2024/7 Navigating ESG regulations: Challenges for transition funds in real estate 16th Deloitte Private Art & Finance Conference Cultural impact investing focus T he 16th annual Deloitte Pri- vateArt &FinanceConfer- ence tookplace onTuesday, 22October at Deloitte premises in Luxembourg, withmore than 900 people registered from74 countries joining inperson and online. SponsoredbyARTEGenerali and the Zidoun-Bossuyt Gallery, the conference featured insightful re- marks from32 prominent interna- tional figures in the industry from 13 different countries. The full-day event focused on exploring the intricate relationshipbetweenfinance, artsandculture,withvariouspanelsoffer- ing diverse perspectives on how finance canhelp support the cultural andcreative industries, which account for 5.3% of the EU’s gross domestic product (GDP), ac- cording toEurostat. The conference focused on three main topics: - The rise of impact investing in the Cul- tural &Creative Economy - How philanthropic cultural initiatives can support public good - Measuring the social impact of cultural investments With this 16th edition, Deloitte Private Art & Finance aimed to promote dia- logue between social impact and impact investment and the cultural and creative sectors, not only touncover the opportu- nity in this unique industry, but to ulti- mately increase collaboration among family offices, UHWNIs and socially re- sponsible investors as they realize its po- tential. The conference highlighted the challenges in accessing the needed fund- ing, financial models that could support theCultural&CreativeEconomy,aswell as financial frameworks and products thatbetterreflecttheculturalandcreative industries ecosystem. Other engaging topics were also new philanthropic cultural initiatives and their contribution to the public good, the importance of creative economies in- creasingly attracting impact investors as well as learnings from employing inclu- sive strategies. Theafternoonsessionfocusedonbuilding reachandscaletounlockthefullpotential of cultural impact investing by 2027, the year in which the impact investment movementwill have its 20th anniversary. This was followed by a panel where in- vestmentleaderssharedtheirperspectives onpossibletrajectoriesofculturalandcre- ative impact funds globally. Topics in- cluded methodologies for measuring, monitoring, and reporting the social im- pact of cultural activities; significant gaps in the familiarity andutilization of frame- works like UNESCO Culture 2030; and transparency in sustainability reporting. Ashighlightedforthefirsttimeinthe2023 ArtTactic andArt & Finance Report, and in February 2024 in The “Arte e iniziative culturali come risorse per la sostenibilità sociale” study by Deloitte Italy and the Università di Pavia, only 38% of respon- dents are aware of the UNESCO frame- work, with merely 7% utilizing it, and 34.5% do not communicate any sustain- ability or social performance data. The conference concluded with a com- pelling speech on how decentralized fi- nance and Web3 technologies can em- powerhigh-net-worthindividuals,family offices, and socially responsible investors whowant todrivepositive changewithin theCultural &Creative Economy. Adriano Picinati di Torcello, Director and Global Coordinator of theArt & Fi- nance Initiative said: “Cultural and cre- ative investing is about recognizing the deep impact art andcreativityhas onour lives, far beyond itsmonetaryvalue.”He continued: “Whenwemixpassion for art with smart financial strategies, we can truly make a difference in preserving culture and supporting creators. With the aidof technology,wehave incredible tools at our disposal to create sustainable and innovative investment opportunities in the cultural and creative world. The 16th iteration of the Art & Finance Con- ferencewas dedicated to exploring these exciting possibilities so we can ensure a vibrant, sustainable future for the arts— onewhere creativity thrives alongsidefi- nancial prosperity.” Since 2008, Deloitte Private has studied and celebrated the convergence of fi- nance, culture, and business. Each year, international experts gather to discuss the biennial Art & Finance Report’s key findings and themes. ©Deloitte