Green funds: Late movers will lose market
Declaring funds “light green” or “dark green” in terms of the EU Disclosure Regulation continues to be a slow process. One and a half years after the regulation came into force with the aim of making ESG compliance more transparent for investors, fund providers are still reluctant to apply for authorisation as Article 8 or 9 funds for the majority of their products. The same is true of real estate funds. There are understandable reasons behind the industry’s reticence, but they are all inadequate.
Many are still hoping for clearer guidelines from the regulator about what a fund must bring to the table in order to be deemed “light green” or “dark green”. Cases of greenwashing in the media have damaged individual company’s reputations – and such debacles are to be avoided at all costs.
But if companies want to wait, they will have to wait a long time. There will be no reasonably comprehensive, binding criteria to define the exact meaning of “sustainable” for a few years at the earliest. The EU Taxonomy still only covers a relatively narrow band of economic activities. The broad and increasingly important field of social sustainability, for example, is still a blank regulatory slate. In the field of environmental sustainability, the first revisions have already arrived, and this will become more and more common over the next few years as technologies develop.
There are also quite a few who shy away from the impact that classification as an Article 8 or 9 fund could have on their returns. But this is short-sighted thinking. Sure – as a green fund you are subject to certain restrictions and your investment universe is reduced. Refurbishing building stock to make it more energy-efficient requires huge investment. All this has an impact on returns – even more so for “dark green” products than for “light green” ones.
But while some are dithering, others are forging ahead and staking their claims on the market. As early as last November, a survey from the investment company Empira found that only a quarter of investors will still be willing to invest in funds that do not qualify under Article 8 or 9 in the future. While some providers are sticking by products that are to be slow sellers in years to come, others are investing in the products that will be the standard a few years from now.
It’s not rocket science
These first-movers have recognised that they themselves are in the best position to assess which adjustments in their portfolio will have the most positive impact in terms of sustainability. They have developed scoring models with which to evaluate potential real state acquisitions and their existing portfolios from an ESG perspective. In the real estate industry, there are numerous starting points for environmental sustainability that are easy to define and quantify, such as a building’s energy efficiency or the share of renewable energies in the energy mix. Other criteria can be used to assess social sustainability, such as accessibility and social rent policies.
These companies have also defined how to apply sustainability criteria in the acquisition process and to the properties in their existing portfolios. In many cases, they have specified a binding roadmap, setting out how and when to improve the scoring of the buildings in their portfolios, for example through energy-efficiency refurbishments.
The providers already have access to the necessary data, and the development and institutionalisation of processes within the company is not rocket science. But anyone who puts off making the necessary adjustments for too long will have a hard time in the medium term, especially in a market where sustainable products are becoming the standard.