Sustainability: how the fund industry is dealing with its megatrend

ALFI Rentrée, day 3

The cross-border fund sector was shaken by the turbulence that erupted in equity markets after the onset of the Covid-19 pandemic, but there’s little sign that it has suffered any permanent damage. European UCITS assets are down 6% so far this year, a similar decline to those in 2011 and 2018, according to Deloitte partner François-Kim Hugé; in fact, there have been net inflows in every month except March, which saw net redemptions of €313bn.

On stage from left to right: Luis Cavero, François-Kim Hugé, Sean O’Driscoll. Via video call: Alain Mandy.

Sean O’Driscoll, country head of Universal-Investment in Luxembourg, says the pandemic has most affected small and mid-sized asset managers who rely more on face-to-face meetings for business development, while larger firms have been developing new channels such as webinars and virtual workshops. Wellington Management Funds COO Alain Mandy argues: “Technology will determine who will survive and who will not. It is critical to being close to the client, but there is also a trend toward proximity, with big groups opening local offices.”

These trends are taking place against a backdrop of falling fee levels, Mr Hugé says, driven by cost transparency as well as growing economies of scale, and regulatory and reporting harmonisation. And next year, he says, the EU Cross-Border Fund Distribution Directive will end the requirement for a local presence in some countries.

Mr Mandy complains that rules still vary from country to country, and the ”megatrend” of ESG investing is adding to the challenges: “Investors come to us with their own screening lists, and use different data providers.” To some extent that will change with the implementation of the EU’s Sustainable Finance Disclosure Regulation, scheduled for next March, although Linklaters partner Martin Mager notes that its regulatory technical standards may now not take effect until 2022.

From left to right: Pedro Fernandez Diaz, Martin Mager, Julie Becker, Tobias Huzarski, Philipp Mueller.

Luxembourg Stock Exchange deputy CEO Julie Becker insists that SFDR compliance should not be postponed, “even if we accept the first batch of disclosures will be imperfect.” The exchange is trying to help; it has just unveiled the LGX DataHub, a centralised database for green and sustainable bonds that will convert unstructured into structured data and by year-end cover the entire sustainable bond universe.

Sustainable products are gaining ground as investors become more confident about their performance. Commerz Real head of impact investing Tobias Huzarski points to the increasing competitiveness of green electricity generation, adding: “If non-sustainable activities had to internalise their environmental and social costs, their returns would be much lower.”