Sustainable Finance: The key strategic decisions for Alternative Investment Managers
This month’s guest blog from Olivier Carré and Philippe Belche, Partners at PwC Luxembourg examines the drivers of ESG for Alternative Investment Managers and how funds can meet these new standards of sustainable finance.
Sustainable Finance has long been a topic discussed outside of the financial services industry. The approach adopted by some Alternative Managers was to voluntarily sign the PRI or UN SDGs Charter.
Yet, the external forces impacting the Alternatives Industry since last year have changed considerably. Both from an investor and regulator perspective, the alternative funds ‘manufacturers’ and ‘distributors’ are confronted with new standards and expectations. The Alternatives Industry is now directly targeted by laws and regulations that impose governance, investment and disclosure standards serving ESG (Environment, Social, Governance) goals, making sustainability a strategic priority on the same level as investment performance.
Sustainable Finance has two facets: a regulatory compliance (must-have) and a business strategic benefit. The business strategic angle is made more important by regulatory changes, since it’s not only shaping the regulatory compliance, but increasingly determining the competitiveness and ‘economic sustainability’ of the financial institutions.
Business impacts & strategic decisions for an Alternatives Manager
The impacts for the managers are stretching through the full value chain as regulators begin to target the inclusion of sustainability/ESG criteria in the investment approach. This will require fund managers to re-design their investment process and to gather additional data on their investment targets. These targets, i.e. the corporates, will be required to disclose more sophisticated sustainability data. Such disclosure will be either imposed by voluntary (e.g. TCFD) or mandatory standards (e.g. EU non-financial disclosure directive) or solely upon request by the private equity investors.
As such, the strategic business decisions for an Alternative Manager are limited to (i) not adopting sustainable investment strategies or (ii) to ringfence the new approach (i.e. limited number of dedicated ESG AIFs) or (iii) to include the sustainability criteria as a baseline in all its portfolios and investment strategies.
Whatever decision they make, all these changes will be subject to disclosure requirements starting March 2021 and subject to minimum technical criteria, defining sustainable business activities, starting 2022/2023 (i.e. Taxonomy).
Business impacts & strategic decisions for a distributor/investor
On the investor side, the impacts will be different between the wholesale/retail investors and the institutional/fiduciary investors (i.e. pension funds, insurance companies).
For the wholesale/retail investors, the distributors subject to IDD or MiFID will ‘ask’ the investors about their preference to invest in a sustainable manner. Although the exposure of AIFs to this investor universe is limited, requests are likely to be received from HNWI and UNHWI as well as Family Offices, distributors need to decide on two main strategic choices: (i) what new (sustainable) products to add to the product shelf and (ii) how to include the sustainability objective into the client risk and investment profile.
In particular, the management of a double investment objective, i.e. financial yield and sustainability, will stress the discretionary and investment advisory teams and systems, triggering operational and upskilling challenges.
Finally, the institutional investors have already been imposing sustainable investment behaviors onto their product providers and investment managers. This trend is now enshrined in the EU rulebooks, formally requesting EU professional investors to retain sustainability as one of their fiduciary goals. So, the pressure from this client segment will further accentuate the strategic choices of the manufacturers to consistently and credibly implement sustainability into their product range, most likely on a much broader scale than anticipated today.
About the authors
Philippe Belche, Partner FS Consulting – Alternatives investments, Luxembourg
From strategy analysis to operational implementation, Philippe Belche has successfully supported local and global asset managers and fund service providers over the last 10 years. A seasoned professional in the alternatives industry (private equity, real estate, infrastructure, private debt) and AIFMD regulations, his expertise ranges from strategy advisory, operational setup and improvement to process automation and digitisation, project management, and both service and software provider selection. Philippe also designs and gives technical and soft skills training both within PwC and externally. He is fluent in Luxembourgish, English, French and German.
Olivier Carré, Markets and Strategy – Financial Services Leader, PwC Luxembourg
Olivier Carré, Markets & Strategy – Financial Services Leader of PwC Luxembourg, joined the firm in 2003 after 5 years of experience in Audit and Consulting. Olivier started his career as a Financial Services Consultant and became a Partner in 2009, leading the Regulatory Advisory team since then. He was the PwC Luxembourg Banking Industry Leader from 2014 to 2017 and is member of the Global Asset & Wealth Management Leadership Team. Olivier has gained a broad experience in the financial services industry, especially in the investment fund and asset servicing industries, leading international engagements for Asset Managers, Wealth Managers and Financial Institutions focusing on operational change, strategic advice and regulatory compliance. Olivier holds a Master’s degree in Finance and Tax Law and a Master’s degree in Management and Economics Sciences from HEC-University of Liège.
To find out more about professional services, visit https://www.pwc.lu/en/sustainable-finance.html
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