Author: Hanna Welter

The final day of the event focused on strategic themes facing the asset management industry and Luxembourg’s place in it, including sustainable finance, planning for future demands from different types of investors, how the local financial industry will attract and retain young blood in the post-Covid world, and the impact on reasons for investing of people living longer lives.

 

 

Camille Thommes, Director General, ALFI, noted the busy ongoing work of the Association over the past year, dealing with Brexit and helping members prepare for the SFDR and subsequent regulatory requirements in the pipeline. With a representative office in Brussels, he noted that the Association responded to some 24 regulatory consultations over the period, and worked hard to aggregate its own and member responses beyond sustainable finance and alternative assets to also cover issues such as outsourcing, safekeeping of assets and valuations of assets of AIFs.

 

 

Staying with the key theme of sustainable investing, Michael Maldener, Managing Director & Conducting Officer, Nordea Investment Funds SA, interviewed Andrew McDowell, Partner, Advisory and Strategy PwC, for his thoughts on “looking beyond the rim of the teacup” – in other words, to look up and ahead at the key challenges and opportunities for Luxembourg.

McDowell stressed that investors and the asset management industry more broadly need to recognize that the challenge of sustainable investing lies beyond regulation and compliance, and that the SFDR marks the start of a strategic journey. This proffers huge opportunities for a financial centre such as Luxembourg in ‘green finance’, in the same way it previously benefitted from being a ‘first-mover’ on UCITS. But there will be competition from jurisdictions such as Ireland.

 

 

The panel of Sébastien Danloy, Global Head Asset Owners and Managers, HSBC Securities Services, Stephen Cohen, Head of EMEA iShares & Wealth business and Index Investments. BlackRock, Guillaume Prache. Managing Director, BETTER FINANCE, and Peter Preisler, Managing Director, Head of Marketing and Business Development, Europe & Africa, Oaktree Capital Management, L.P., attempted to look ahead through a crystal ball to understand what future demands there may be from large pension funds, European distributors and end investors, advances in fintech will drive down costs and open up new ways of offering mass customisation. But the industry must also ensure solutions are suitable to build rather than risk destroying trust – particularly important as the industry shifts capital towards, say, specialist elements of sustainable investments such as renewables, throwing up a whole new challenge of educating financial professionals to also understand environmental factors.

 

 

Noel Fessey, CEO, EFA, Micaela Forelli, Managing Director, Luxembourg | Head of European Distribution, M&G International Investments S.A., Carlo Thelen, Director General, Luxembourg Chamber of Commerce, and Rachel Treece, CEO, fts global and the Henka Institute, contributed to a panel of different sorts, as they pondered the effect Covid has had on their respective organisations in Luxembourg, and how they may evolve in the post-pandemic world.

 

In a wide-ranging discussion, they touched on local infrastructure and cross-border travel for commuters, the evolution of the academic sector to churn out graduates with relevant skillsets, the factors that have affected and will continue to affect in-house training of the next generation of leaders amid a digitalisation trend, and what hybrid model of office and telecommuting may come to shape the future of the local financial industry.

 

 

Andrew J. Scott, Professor of Economics, London Business School & The Longevity Forum, provided the final keynote of the conference. He noted how the average lifespan is increasing by some 2-3 years every decade. The implications are profound for both society and the individual. Advances in longevity could bring an additional 100,000 hours of life, which may be partly pursued through work, but equally elsewhere. “Do you like your current job? What will keep you motivated? How do you keep healthy?” the professor asked. If people are living longer, they need to age well.

 

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Day three of the ALFI European Asset Management Conference 2021 saw a deep dive into multiple facets of regulation, with insights from regulators as well as forward-looking expectations from asset management and asset servicing professionals engaged in building mechanisms to deal with a pending wave of regulatory changes.

 

 

Marc-André Bechet, Deputy Director General, ALFI, welcomed delegates by framing the SFDR as the start of a long transition process to ‘green’ the economy, preferably through engagement and a best-in-class approach.

 

 

 

The event then moved on to two key regulator views, from Ugo Bassi, Director of Financial Markets at DG FISMA – European Commission and Marco Zwick, Director, Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg.

In his keynote, Bassi make a crucial statement on the AIFMD review, noting that it will not look to tear up existing Level 1 implementation, but limit itself to “targeted improvements and clarification” in areas such liquidity management tools, data gaps as relevant to financial stability, and loan origination. The review is not intended to be a revolution, he stressed.

Other matters on the agenda for the European Commission include ELTIFs, anti-money laundering, and MiFID/MiFIR in context of Capital Markets Union objectives. Bassi also described the equivalence model as the right one to use in respect of Brexit and the ongoing work towards a Memorandum of Understanding (MOU) with the UK.

Zwick, interviewed by Corinne Lamesch, chairperson, ALFI, re-iterated the idea that SFDR is just the start of the sustainable investment journey. More related regulation will come, he suggested, but will be worth it when in future there is a look back at the changes wrought.

Existing regulation in Luxembourg survived its Covid stress test, as measured by the low ratio of funds suspended earlier in the pandemic, the way the local industry was able to shift to new ways of working, and the availability and use of liquidity management tools. Lessons learned during the pandemic regarding CSSF virtual on-site visits are likely to be applied ongoing.

 

 

The day also saw delegates taken on a ‘regulatory journey’ by the troika of Silke Bernard, Partner, Linklaters LLP, Nathalie Dogniez, Partner, PwC and Michèle Eisenhuth, Partner, Arendt & Medernach, who discussed not only sustainable finance via the SFDR and Taxonomy, but also products intended to meet long term savings and investment needs such as the PEPP and ELTIF, consumer/retail investor issues such as PRIIPs and fees, and a raft of other regulatory changes near-term and long-term.

 

 

Echoing the comments of Ugo Bassi, Evelyne Christiaens, Head of the Legal Department, ALFI and Hema Jewootah, Conducting Officer, Chief Compliance Officer and MLRO, Lombard Odier Funds (Europe) S.A., addressed specifics in regards to anti-money laundering developments in Luxembourg, and the requirements placed on entities, their boards and managers ongoing.

 

 

And Marc-André Bechet, Vanessa Camilleri, Head of Office, Member of Management, Partners Group (Luxembourg) S.A., Johannes Höring, Local Managing Director and Conducting Officer, GAM (Luxembourg) S.A. and Sean O’Driscoll, Country Head, Managing Director, Universal-Investment-Luxembourg S.A., took on the meaty topic of CSSF Circular 18/698, as applicable to investment fund managers for some years now; to understand lessons learned in areas such as oversight of delegates, and how digitalization and automation can be used to reduce the operational burdens associated with this particular piece of regulation.

 

 

Rounding out the official programme was a Masterclass hosted by State Street, looking at diversity and inclusion within the industry. Here, State Street colleagues Abdel Hmitti, Head of EMEA Private Equity and Real Assets Servicing, Loreto Calaf, Investment Compliance Analyst – NextGen & Latin American Professionals Group networks, Marin Gurlevsky, Business Analyst, Client Program Office, Barbara L. Mabe, Financial Risk Manager, Chair of Race & Ethnicity Network, and Veronika Zukova, EMEA Head of Alternatives Segment Strategy, pondered the strides made thus far, but also how the definition and purpose of diversity may change again in future, partly as more relevant workplace and employee data becomes available, but also as a generational shift occurs with an increasing proportion of Millennials and Gen-Z people joining the industry.

 

In an additional off-programme session, CSS hosted a Zoom meeting looking at the future of fund reporting and the implications of the introduction of, initially, Level 1-linked reporting requirements of SFDR.

 

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Day two of the ALFI European Asset Management Conference 2021 delved into several key top level political, legal and business environment topics affecting asset management and servicing, including insight into the state of Luxembourg as a domicile – ahead of the more technical aspects of regulation set to be discussed tomorrow.

 

 

Emmanuel Gutton, Director Legal & Tax, ALFI, reminded delegates of the Association’s Working Group efforts around the AIFMD review and how it has been pushing to make Luxembourg’s voice heard at the European Commission.

 

 

That baton was picked up by H.E. Pierre Gramegna, Luxembourg Minister of Finance. He touched on the resilience experienced not only by Luxembourg as a financial centre during the pandemic, but also the proven resilience of EU regulation intended to ensure the asset management industry can attract capital and manage it safely during a crisis.

Data in the wake of the pandemic has proved the sceptics wrong about the impact of human activity on the climate, thus illustrating the role the asset management industry must play in responding to the climate change challenge. And with some 80% of existing sustainable funds being European, there is a key ongoing role for Luxembourg as a financial centre in growing sustainable investments, he noted. What the government can do is create a fiscal and legal framework to not only support sustainable investments, but also facilitate digitalisation of the industry and make it easier for locally based businesses to attract international talent.

 

 

Elements related to Gramegna’s points – people, skills, outsourcing, operating models, technology and the shift from traditional to alternatives – were the focus of a panel constituting Rajaa Mekouar, Private Equity investor, former CEO and Chairwoman of LPEA, Eduardo Gramuglia, Senior Vice President, State Street Bank International GmbH, Luxembourg Branch, Brian McMahon, Managing Director – Global Head of Alternative Sales, Asset Servicing, BNY Mellon and Paul Conroy, Group Head of Real Assets, Aztec Group. As a panel, they observed that to an extent, the office of the future was on horizon even before the pandemic, but Covid had brought it into the present through use of IT, new working practices and the link to diversity progression.

 

 

Change has also come to third party management companies (‘ManCos’) and AIFMs, which was the topic discussed by Maria Löwenbrück, Executive Board Member, Union Investment Luxembourg S.A., Steve Bernat, Founding Partner, ONE group solutions, Arnaud Bouteiller, General Manager – Member of the Executive CommitteeCasa4Funds, and Martin Vogel, CEO, MDO, a DMS Group Company. While there may be no such thing as a typical ManCo client, they agreed that consolidation in the sector is coming, along with a new wave of tech implementation and automation to improve services, and a need therefore to engage with regulators.

 

 

Brexit and the practical challenges facing marketeers and distributors of funds was also in the spotlight, as Jerôme Wigny, Partner, Elvinger Hoss Prussen, Philip Bartram, Partner, Travers Smith, and Rupert Rossander, General Counsel (EMEA), Invesco, discussed the implications both for UK managers seeking European investors and European managers seeking UK investors.

Brexit has triggered practical and theoretical ‘workarounds’ for marketing and distribution, they noted. But regulatory risk remains, such as new law in the UK that will leave HM Treasury responsible for equivalence decisions. Lawyers meanwhile are left pondering legal ‘salami slicing’ of staff roles and identifying possible ‘chaperones’ for specific marketing and distribution purposes.

 

 

Wrapping up the day, Morningstar brought a Masterclass on SFDR and the EU Taxonomy, in which Olivier Goemans, Head of Investment Services and Innovation, Banque Internationale à Luxembourg shared thoughts around upcoming EU regulation. Hermen  Molendijk, Head of Morningstar Benelux, Tim Walton, Data Director, Morningstar, Margaret Stafford, Senior Product Manager, Morningstar, and Andrea van Dijk, Executive Director, Commercial Strategy EU Action Plan, Sustainalytics, outlined specific developments that users of investor data services can expect in the wake of the mountain of new data expected to be made available as asset managers and underlying companies held in portfolios respond to the new regulatory requirements imposed by the EU.

 

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ALFI Digi Pulse Asia

Tokyo, 26 February 2021

 

アジアのESGへの舵取りがもたらすルクセンブルクファンド業界への新たな機会

 

アジアの資産運用者や投資家が環境問題、社会的インパクトや政府戦略に軸足を置くことにより、投資ファンドのハブとして投資業界に寄与しているルクセンブルクに新たな機会がもたらされていることが、２月２４日から２６日の間に開催されたALFI Digi Pulse Asiaのイベントのスピーカーの話として明らかになりました。

 

さらにスピーカーによると、アジア太平洋地域の投資ファンドマネージャーや政策決定者はEUにおける持続性に関わる法規制の枠組みに感化されており、その手始めに今月施行の金融サービスセクターにおけるサステナビリティ関連開示規則（Sustainable Finance Disclosure Regulation、通称SFDR）がありますが、ルクセンブルク公国は特にオルタナティブ資産への投資を行う、EU内外の投資家向けのファンドストラクチャーを組成できる国として第一の選択肢となっています。

 

シンガポールや香港などアジア諸国においてすでにルクセンブルク籍ファンドがすでに多数存在しており、ルクセンブルク公国が日本の金融機関にとって長年欧州の窓口になっている中で、こうした新たな傾向はルクセンブルクが世界のクロスボーダーファンドの世界的ハブとして台頭してきてからの３０年間で培ってきた関係をさらに強固にするものとなるでしょう。

 

変化する状況下での投資

ピエール・グラメーニャ財務大臣は、大多数の従業員が在宅勤務となった中で、ほぼ通常と同様に業務遂行が可能であったということは、ルクセンブルクの金融業界がCOVID19の国民経済への影響を最小限とする能力を備えている事を示す「実世界でのテスト」であったと参加者の皆様に伝えました。財務大臣が言うには、現時点でのチャレンジは欧州経済回復戦略の実行とともに、デジタルトランスフォーメーションと環境変化への対応という重点的両政策があり、民間投資が政府資金とともに重要な役割を果たすと述べています。

 

グラメーニャ財務大臣曰く、ルクセンブルクはこれまで過去数年間欧州における持続性に関わる金融の取り組みを先導しており、ルクセンブルクグリーン取引所のESG債券プラットフォームの発足を2016年に、また、欧州初のサステナビリティボンドの15億ユーロの発行を昨年9月に行いました。一方、サブスクリプション税制が導入され、ファンド資産の持続可能性に応じて段階的な税の減額がされています。最後に財務大臣は「小さければ小さいほど、投資家に信頼を与える安定性と安全性のある法的枠組みが必要になります。」と結論付けました。

 

ヴァーチャル環境下での監督

金融規制当局であるCSSFのディレクターであるMarco Zwick氏は、流動性管理ツール、ルクセンブルクのファンド業界の多様性、在宅勤務を容易にするデジタルツールが、2020年2月と3月における市場の高いボラティリティの中で金融セクターを安定させるのに役立ったと述べました。それ以降、ファンド資産はそれまで以上に回復し今年1月に初めて5兆ユーロを超えました。CSSFの役務は変わりませんでしたが、オンラインでのインタビューと画面共有のおかげで、バーチャルな関わり合いがよりバーチャルになりました。

 

本年CSSFにおける主な優先事項は、流動性リスク管理への取り組みを完了させること、投資家が徴収されるUCITSファンドのコストについてのさらなる調査、金融商品の販売や裁量ポートフォリオ管理に対するMiFID II法の影響、およびEUのオルタナティブ投資ファンドマネジャー規制（Alternative Investment Fund Managers Directive、通称AIFMD）に関する継続的なレビューがあります。さらに、最重要課題は、資産運用業界におけるESG移行への監督であり、EUの分類法規則が最終的に制定されてからSFDRが続きます。「時には基本原則を変えていくために法規制が必要となります」とZwick氏は述べました。続けて、「我々が目指すのは所謂グリーンウオッシングをどんなコストを掛けてでも避けることです」とも述べました。

 

持続可能性に関する法律への対処

気候変動に対する方策を導入するベンチマーク規制やパリ協定に沿ったベンチマークなど、ファンド業界に差し迫った持続可能性に関する法律は、欧州委員会の欧州グリーンディールの目標に基づいて推進されていると、Linklatersのルクセンブルクの顧問であるJosiane Schroeder氏は述べました。これには、2050年までのカーボンニュートラルと2030年までに温室効果ガス排出量を2019年のレベルから40％削減することも含まれています。

 

投資先企業が開示要件の対象とならない場合、運用者や販売者にとって法令遵守事項が複雑になることもあり、これはアジアを拠点とする運用マネージャーとルクセンブルク籍ファンドにとって問題となるとEast Capitalのパートナー、Karine Hirn氏は述べました。しかしながら、EUと中国の間の分類法の共通化プロジェクトなど、標準化に向けた国際的な取り組みもあるとKarine Hirn氏は述べました。

 

昨年の景気減速する間に現状した炭素排出は、歓迎はされていても持続可能でもなく不十分でしたが、大気汚染の改善など、気候変動に対する方策の他の利点が浮き彫りになったことが認められております。昨年はESGファンドと戦略への記録的な資金流入が見られた現象があることを特記して、Hirn氏は「多くのチャレンジはグローバルであり、それに対してはグローバルな解決法が不可欠です。私たちはこの危機における経験を無駄にしてはいけません」と述べました。

 

AIFMDと外部委託に関する議論

過去数年間のルクセンブルク金融業界における主要な出来事の1つは、主要な貿易相手国である英国がEUから離脱したことであり、パスポーティングによる国境を越える権利が失われ、新しい規則や共同契約を作る必要がありました。

 

Elvinger Hoss PrussenのパートナーであるGast Junker氏は、この問題はAIFMDの下での外部委託の将来に向けた取り扱いに関する議論と絡み合っていると指摘しました。また、「法規制はきちんと運用され、同様の体系は他でも使われてます。外部委託は現状のままにしておく方が良いでしょう。しかしながらEUでは大きな変更はないにしても、小さな調整を検討しています。」とも述べました。

 

香港にあるArendt＆Medernach社のパートナーStéphane Karolczuk氏は、SFDRは持続可能性に関するEUの規制の枠組みに向けた最初の一歩に過ぎず、詳細な規則はまだ確定されていないため、一部の資産運用会社ではファンドの持続可能性の特徴について定義することに難しさを感じていると指摘し、「情報開示を強化する必要があります」と述べました。

 

選ばれし法管轄区

ファンドのサービスプロバイダーであるApexGroup社のアジア太平洋地域リージョナルマネージングディレクターValérie Mantot-Groene氏は、ルクセンブルクがアジアの資産運用会社が頻繁に選ぶヨーロッパの法管轄区であると述べました。その理由として投資戦略や対象投資家にもよりますが、いくつかの要因の組み合わせとしてあげているのが、アジアおよび世界のプレーヤー間における高い評価、透明性・安定性の高い法体系、規制、税制、「アジアの投資家にとって重要な要素」である投資家保護の基準、UCITSと非UCITSファンドの販売拠点としての優位性やCSSFとアジアの規制当局との合意事項等がございます。

 

HSBC銀行ルクセンブルクの営業ディレクターRiccardo Millich氏は、ルクセンブルクにおいて洗練された包括的な商品ツールキットが増えてきていることを指摘しました。2014年のSpecial Limited Partnershipや2年後のReserved Alternative Investment Fundといった近年のイノベーションが、市場参入までの時間を大幅に短縮しシンガポールの資産運用会社を惹き付けました。

 

さらに、ルクセンブルク大公国が中国の金融機関にとってヨーロッパへの玄関口として十分に確立されており、現在ルクセンブルクには7つの中国の銀行が進出していると述べています。また、現在中国に投資するすべての外国ファンドの約3分の1がルクセンブルク籍ファンドであり、これは香港以上であり、ルクセンブルクは現在点心債の最大の上場取引所であり、人民元建てファンドの主要ハブとなっております。

 

グレーターベイエリアにおける機会

ICBC Asset Management Globalのプロダクトイノベーション担当マネージングディレクターBing Li氏は、中国の資産が世界の投資家ポートフォリオで依然として大幅に過小評価されていることを考えると、成長の機会は非常に大きいと述べました。中国は世界のGDPの16％を占めていますが、株式市場の時価総額は世界の5％にしか過ぎません。

 

Cititrust香港のStuart Aldcroft会長は、Wealth Management Connectのスキームを通じて、香港金融セクターは広東-香港-マカオのグレーターベイエリアにおいて大きな機会を得られると予見しています。地域内の国境を越えてファンド、銀行サービスやその他の金融商品の販売が可能となるからです。これはルクセンブルクUCITSに直接利益をもたらすことはありませんが、特定のファンドはファンドオブファンズに組み込まれることが可能となり、当該スキームを通じて販売されることとなります。「香港は、上海でさえ模倣ができない国際金融センターであり続けるでしょう」と述べました。

 

東京を拠点とするアセットマネジメントOneオルタナティブインベストメンツのインフラファンドマネージャーJack Wang氏は、ルクセンブルクがケイマン諸島よりもファンド登記国として好まれることとなるだろうと信じています。それはアセットマネージャーがサービスプロバイダーのデューデリジェンスに重点を置き、多くの機関投資家がOECD国における登記という安心感を求めているからです。「フィーダーファンドのように複数の法管轄国に分散するよりも、全体のストラクチャーがルクセンブルクにある方が簡単で、さらに二重課税防止条約の恩恵も受けられます」と述べました。

The first day of the ALFI European Asset Management Conference 2021 offered insights into the trends sparked by a tumultuous past year, but also opportunities ahead for both traditional and alternative assets by managers willing to grasp the themes of ESG and digitalisation.

 

 

ALFI chair Corinne Lamesch noted a 5% rise in net assets under management in the Grand Duchy, which helped take total AuM past EUR 5 trillion in the 12 months to the end of January 2021 – despite the impact of the pandemic in early 2020.

Describing the industry as being at a “crossroads”, she also noted Brexit is a reality, that globalisation is being challenged, leading to pressure on asset managers’ business models as they ponder delegation, and that margins continue to fall as the success of low-cost passive managements feed investor appetite for more.

On the upside, the industry is set to leverage opportunities out of long-term sustainable investment themes. The introduction of the EU Sustainable Finance Disclosure Regulation is just the start of a journey to provide additional clarity to investors on what exactly constitutes sustainable investment products. China and digitalisation of financial services and products also offer future hope.

 

 

Pondering which strategies might best take advantage of the trends outlined, Silvio Cruz, Senior Vice President and Managing director, Alliance Bernstein, argued for the ability of active managers to take advantage of the uncertainty linked to the exit from the pandemic alongside the evolving ESG agenda which may require investors to move away from certain issuers.

But there is an increasing ability to respond to ESG also through passive, argued Markus Goetschi, Executive Director, Head Passive Products UBS Asset Management, who noted that last year saw the number of European ESG ETFs increase to 236 from 135.

European money market funds were hit hard at the start of the pandemic, but off the back of European Central Bank action, the market has stabilised, and now have significant cash assets to hand even as they too respond to ESG and accelerate adoption of non-financial insights into decision-making, added Patrick Simeon, Head of Money Market, Amundi.

 

 

Mark McFee, Director, Global Insights at Broadridge noted that active managers did well Q2-4 2020 in Europe, with investors partial to high conviction strategies. The trend could continue through 2021, albeit alongside a long-term trend towards passive. That was matched on the private investments side by data from Dave Lowery, Head of Research Insights at Preqin, who described the European private capital fundraising year gone by as “remarkably resilient”.

 

 

Carolina Minio-Paluello, Global Head of Product, Solutions and Quant at Schroders touched on the industry digitalisation theme by noting that ‘client-centricity’, or ‘personalisation’ from a product/solutions structuring point of view means the industry needs to be able to deliver more lower minimum separate accounts. Daniel Rotherford, Global Head of Product Management & Governance at HSBC Global Asset Management chimed in that “it is only a matter of time” before Amazon and others move on the asset management space, given digitalisation.

 

 

Continuing that theme, but in a different sense, Marija Skramic, Associate, Investments Infrastructure at Brookfield Asset Management outlined expectation of pending $ 1.5 trillion capital investments in data assets around 5G, fibre to the home, etc., described as 1-in-100 years upgrade cycle. Shawana Fayolle, Managing Director at Bentall Green Oak identified a commercial real estate angle to the theme: European online retailers need a lot more space.

Regulation drives much by way of industry development. However, the conference heard unequivocally a ‘No’ to ripping up Level 1 of the AIFMD as part of any review. That does leave a bit of a grey area regarding Levels 2 and 3 suggested Agathi Pafili, Head of Europe Government Relations at Capital Group, Martin Bresson, Public Affairs Director at Invest Europe, and Jeff Rupp, Director Public Affairs at INREV.

 

 

Finally, Brad Caswell, Investment Funds Partner at Linklaters LLP outlined his expectations of the impact on the US asset management industry of the Biden-Harris administration. Interviewed by Hermann Beythan, Partner at Linklaters LLP, Caswell suggested asset managers should expect regulatory focus on areas including operational resilience, private equity/hedge funds conflicts of interest issues, ESG priorities, digital assets & crypto.

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Asia’s pivot to ESG creates new opportunities for Luxembourg fund industry

The embrace by asset managers and investors in Asia of environment, social impact and governance-focused strategies opens up new opportunities for Luxembourg as an investment fund hub serving the industry, according to speakers at the ALFI Digi Pulse Asia events over February 24 to 26.

They say investment managers and policy-makers across the Asia-Pacific region are drawing inspiration from the European Union’s burgeoning regulatory framework on sustainability, starting with the Sustainable Finance Disclosure Regulation taking effect this month, while the grand duchy remains asset managers’ first choice for structuring of vehicles aimed at investors both within and outside the EU, especially for alternative assets.

With Luxembourg funds already representing a sizeable proportion of the market in Asian jurisdictions such as Singapore and Hong Kong, and the grand duchy a well-established European outpost for Japanese financial institutions, these emerging trends appear set to strengthen relationships that have been taking root for three decades, since Luxembourg’s emergence as the world’s leading cross-border fund industry hub.

Investing in climate transition

 

 

Finance minister Pierre Gramegna told participants that the ability of Luxembourg’s financial sector to operate nearly normally with the vast majority of staff working from home represented a “life-size test” of the industry’s resilience that minimised the impact of the Covid-19 pandemic on the national economy. Now, he says, the challenge is to implement a European economic recovery strategy with a dual focus on digital transformation and climate transition, in which private investment is called on to play a critical role alongside public funding.

Luxembourg has been in the vanguard of European sustainable finance initiatives over the past few years, Mr Gramegna says, including the launch of the Luxembourg Green Exchange ESG bond platform in 2016, as well as the government’s issue of €1.5bn of sustainability bonds, a first for Europe, last September. Meanwhile, the subscription tax system has been adapted to incorporate progressive reductions according to the sustainability of a fund’s assets. He concluded: “The smaller you are, the more you need a legal framework characterised by stability and security that provides investors with trust.”

Supervision in a virtual environment

 

 

Marco Zwick, a director at financial regulator CSSF, says liquidity management tools, the diversity of Luxembourg’s fund industry and the embrace of digital tools to facilitate remote working, all helped to stabilise the sector at the height of market volatility in February and March 2020. Since then, fund assets have more than recovered and exceeded €5 trillion for the first time in January this year. The CSSF’s work did not change in scope, he says, although virtual interactions have become “more virtual”, thanks to online interviews and screen-sharing.

This year the regulator’s key priorities include finishing work on liquidity risk management, a further examination of UCITS fund costs charged to investors., the impact of the MiFID II legislation on distribution and discretionary portfolio management, and the ongoing review of the EU’s Alternative Investment Fund Managers Directive. And a central issue will be oversight of the ESG transition in the asset management industry, with the SFDR to be followed shortly by finalisation of the EU’s Taxonomy Regulation. “Sometimes you need regulation to trigger fundamental change,” Mr Zwick said. “Our goal is to prevent ‘greenwashing’ at all costs.”

Coping with sustainability legislation

 

 

The sustainability legislation impending for the fund industry, including the Benchmark Regulation introducing climate transition and Paris Agreement-aligned benchmarks, is driven by the targets of the European Commission’s European Green Deal, noted Linklaters Luxembourg counsel Josiane Schroeder, including carbon neutrality by 2050 and a 40% reduction on greenhouse gas emissions from 2019 levels by 2030.

 

 

These are issues for Asia-based managers and their Luxembourg funds, given that compliance is complicated for managers and distributors if underlying companies are not themselves subject to disclosure requirements, argued East Capital partner Karine Hirn. However, she points to international initiatives to develop a standardised approach, including a common taxonomy project between the EU and China.

They agree that the hiatus in carbon emissions during last year’s economic slowdown, while welcome, was neither sustainable nor sufficient, although it highlighted other benefits of the climate transition, such as improved air quality.” Noting that last year also saw record investment flows into ESG funds and strategies, Ms Hirn said: “A lot of the challenge is global and needs global solutions. We should not waste the crisis!”

AIFMD and the delegation debate

One of the major events for Luxembourg’s financial industry over the past few years has been the departure of the UK, a major trading partner, from the EU, with the loss of cross-border passporting rights and the need to draw up new rules and co-operation agreements.

 

 

Elvinger Hoss Prussen partner Gast Juncker notes that the issue is intertwined with the debate on the future treatment of delegation arrangements under the AIFMD: “The rules work, and the model is used elsewhere – delegation should be kept the way it is. However, the indications are that the European Commission is not planning revolutionary changes but small adjustments.”

Stéphane Karolczuk, an Arendt & Medernach partner in Hong Kong, notes that the SFDR is just the first step toward the EU’s regulatory framework for sustainability, and that with the detailed rules still to be finalised, for now some asset managers are struggling to define their funds’ sustainability characteristics – “the need is to beef up information disclosure”.

Jurisdiction of choice

 

 

Valérie Mantot-Groene, regional managing director for the Asia-Pacific region at fund service provider Apex Group, says Luxembourg is frequently the European jurisdiction of choice for Asian asset managers due to a combination of factors, depending on their investment strategy and target investors, including its strong reputation in Asia as well as among global players, a transparent and stable legal, regulatory and tax framework, its standards of investor protection – “a key factor for Asian investors” – and its capabilities as a distribution centre for both UCITS and non-UCITS funds, including the CSSF’s network of agreements with Asian regulators.

 

 

HSBC Bank Luxembourg sales director Riccardo Millich also pointed to the country’s increased sophisticated and comprehensive product toolkit, including recent innovations such as the special limited partnership in 2014 and the reserved alternative investment fund two years later, which offers very rapid speed to market and has attracted various Singapore asset managers.

He notes that the grand duchy is well established as the gateway to Europe for Chinese financial institutions, with seven banks now active in Luxembourg; it is now the domicile of around one-third of all foreign funds investing in China, ahead of Hong Kong, the biggest listing centre for dim sum bonds, and a major hub for renminbi-denominated funds. And the opportunity for growth is huge, given that Chinese assets remain significantly under-represented in global investor portfolios, said Bing Li, managing director for product innovation at ICBC Asset Management Global; the country accounts for 16% of global GDP but just 5% of equity capital market capitalisation.

Greater Bay Area opportunity

And the opportunity for growth is huge, given that Chinese assets remain significantly under-represented in global investor portfolios, said Bing Li, managing director for product innovation at ICBC Asset Management Global; the country accounts for 16% of global GDP but just 5% of equity capital market capitalisation.

 

 

Stuart Aldcroft, chairman of Cititrust in Hong Kong, sees a major opportunity for Hong Kong’s financial sector in the Guangdong-Hong Kong-Macau Greater Bay Area through the Wealth Management Connect scheme, which will enable funds, banking and other financial products to be sold across borders within the region. This will not benefit Luxembourg UCITS directly, he says, but certain funds will be eligible to be incorporated into fund of funds products for sale through the scheme. “Hong Kong is and will remain an international financial centre that even Shanghai cannot emulate,” he said.

 

 

Jack Wang, an infrastructure fund manager at Tokyo-based Asset Management One Alternative Investments, believes Luxembourg is gaining ground over the Cayman Islands as a domicile for alternative funds as asset managers focus more on service provider due diligence while many institutional investors look for the reassurance of an OECD domicile. “It’s much simpler to have the whole structure in Luxembourg rather than spread across multiple jurisdictions, as with using feeder funds, and it also benefits from access to double taxation treaties,” he said.

 

 

 

Industry celebrates Luxembourg’s expanding role as alternatives hub

Economic headwinds

Plugged into the data flow

Introducing pledge funds

Pledge funds promise to become a new addition to Luxembourg’s alternative fund toolbox, which already offers a wide range of options, says Clifford Chance Luxembourg partner Paul Van den Abeele. He notes that whereas historically the jurisdiction was the domicile principally of main fund vehicles, today managers are also using it for securitisation, co-investment, carried interest and sidecar discretionary co-investment vehicles. 

The SFDR as game-changer

Open architecture model

 

Shaping the fund industry’s future: Covid-19, sustainability – and Brexit

 

With negotiations on a future trade deal between the European Union and the UK government seemingly on tenterhooks, Brexit cast an understandable shadow over ALFI’s annual London Conference on November 23, a virtual event that attracted around 1,000 registrations. Speakers such as ALFI chairperson Corinne Lamesch emphasised, however, that the close relationship with Luxembourg’s asset management sector is destined to endure: “We will continue to work together with UK fund sector whatever the outcome of the trade talks.”

The Covid-19 pandemic may have shaken up working patterns, changed the economic environment significantly and influenced investment strategy trends, but so far it has not dented the sector’s positive outlook. Lamesch noted: “Luxembourg’s fund industry has demonstrated its agility and resilience – after an 11% drop in March, assets have rebounded to close to their January record high.”

Finance minister Pierre Gramegna says Luxembourg has a more interdependent relationship with the UK than other European countries. “Brexit is not on the minds of many EU policymakers, but I am an exception,” he said, noting that Luxembourg has been well placed to help UK financial businesses adapt to the new legal environment: “We have had four years to prepare for the end of passporting and the need for UK institutions to create an EU presence. And we see a trend toward use of Luxembourg law for bonds because it is close to English common law and offers both flexibility and legal certainty.”

 

Rebuilding bridges

 

While industry members believe an agreement that will minimise disruption for the financial industry should be possible, they warn that deadlock could lead to a damaging loss of trust. Said Luxembourg for Finance CEO Nicolas Mackel: “The election of Joe Biden is a game-changer tipping the balance toward a Brexit deal, reducing the risk of the UK slamming the door, but the time left for implementation is getting short”.

“A Brexit deal is important to the financial services industry because it will change the atmosphere between Britain and the EU. Without a deal, acrimony could last for a couple of years, and it would be more difficult to rebuild bridges.” Mackel was echoed by Schroders’ head of public policy Sheila Nicholl: “We need trust and co-operation, and without a Brexit deal that will take time to rebuild.”

Chris Cummings, CEO of the UK’s Investment Association, added: “We need a permanent structured dialogue with the EU to share ideas, compare notes, and ensure no unwelcome surprises.” But head of European compliance Christopher Dearie says private equity firm Apollo Management is worried about national differences within the EU that could undermine single market opportunities even for firms which, like Apollo, have established substantial operations in EU jurisdictions to prepare for Brexit.

 

Overseas Funds Regime

 

In the meantime, regulators are adapting to the separation of the UK from the EU single market rulebook. Nick Miller, head of asset management supervision at the UK’s Financial Conduct Authority, says the regulator is drawing up an Overseas Funds Regime as the long-term successor to the FCA’s temporary permissions regime to prevent short-term market disruption.

“Our aim is to maintain high standards but to be open to partners in the EU and elsewhere to offer retail funds in the UK,” Miller said. “The onshoring of EU rules will stop because we need to ensure our regulation is appropriate for the UK market. We will develop a UK green taxonomy, which may not be exactly the same as the EU’s, but will target similar outcomes.”

CSSF head of funds supervision Marco Zwick, meanwhile, is focusing on the implementation on March 10 next year of the EU’s Sustainable Finance Disclosure Regulation. “The SFDR will be a big challenge for the sector and for regulators, and everyone will have to move fast. We are defining a fast-track process for prospectus updates, because the EU rules give no leeway on the deadline.”

 

Tectonic shift toward ESG

 

SFDR compliance is just one aspect of the challenge facing the asset management industry in incorporating sustainability into its strategies and operations. “We need to show clients we care about sustainability and to translate that into investment decisions,” said Aviva Investors’ global head of product strategy Steven Blackie.

“There has been a tectonic shift toward ESG, which now underpins every investment strategy in a way not seen two years ago, and we’re only scratching the surface.” This could affect the industry in less obvious ways: “As investors demand environmental and social outcomes, this could tip the balance back from passive toward active management.”

Fidelity International CEO Anne Richards points to the problem of a lack of consensus on sustainability standards and definitions. “I’m less worried about greenwashing than about confusion over what constitutes green investment,” she said. “Managers are having to figure out what’s right – for example, some advocate engagement with fossil fuel companies to effect change, while others simply exclude them. We need comparable and consistent criteria and measurable characteristics. At present there are so many different taxonomies – what we need is something that looks like accounting standards.”

 

Fiduciary duty

 

Schroders’ head of Europe Karine Szenberg is confident, however, that the trend is unstoppable, and it implies a new role for asset managers. “Sustainability and stewardship are completely interconnected,” she said. “Initially the focus was on governance, but environmental and social impact are now equally important. Today unsustainable businesses and sectors have nowhere to hide.”

That’s reflected in the surge in demand for sustainable products from investors; a recent PwC study forecast that ESG considerations could drive up as much as 50% of all European fund assets by 2025. James Broderick, a board member of the London-based Impact Investing Institute said: “Growth of 30% a year should be an opportunity, although for asset managers that are not ready it represents a threat.”

The shift toward sustainable investment may have been slowed by a narrower definition of fiduciary duty in the UK and US, which excludes non-financial considerations, than in other European countries. But European Investment Bank senior adviser Nancy Saich believes this may be about to change – especially with the change of administration in Washington. “A World Economic Forum report at the beginning of this year found that the biggest global economic risks were all related to the environmental and climate,” she said. “Not to embrace sustainability means ignoring major risks.”

Fund service providers face other changes to the business environment. “Both we and our clients are under pressure on costs, regulation and disruption around data technology,” said BNP Paribas Securities Services managing director Robert van Kerkhoff. According to senior vice-president Eduardo Gramuglia, the pandemic has accelerated strategic changes at State Street Bank International to adapt to new cost imperatives and the evolution of asset classes and products.

 

Tailor-made offerings

 

Asset managers, meanwhile, must take into account increasingly differentiated customer needs. Micaela Forelli, head of European distribution at M&G International Investments, says demand can no longer be served by a single fund or range but an ad hoc and niche approach. Amundi business development manager Etienne Lombard added: “Ultra-high net worth individuals with whom you have to listen to their needs – it’s no longer prêt-a-porter but haute couture.”

Independent consultant Peter Grimmett says that in some areas, policymakers need to do a better job. “The industry was very supportive of the European Long Term Investment Fund regime, but what came out was slightly different,” he said. “ELTIFs were to offer regulation and access to retail clients, but the retail rules were tough – so it was easier for asset managers to launch AIFs instead. The basic Pan-European Personal Pension product came with a 1% maximum charge including advice fees, which was very difficult for active asset managers. Changes are needed to make these regimes fit for purpose.”

These developments are taking place just as economic policy fundamentals are undergoing their biggest change in three decades, according to Citi chief economist Arnaud Marès. “The 30-year separation of monetary and fiscal policy is probably over,” he told conference participants. “Economies will continue to need huge government support until a Covid-19 vaccine is rolled out.”

Meanwhile, monetary policy is no longer working as it’s supposed to, he says; even with interest rates at zero, or negative rates, people are convinced they need to save rather than spend. “In addition, governments that have borrowed hundreds of billions of euros need to know that central bank support will not be suddenly taken away. In this new world, central banks have no choice but to ensure interest rates and yields will remain close to zero for a very long time.”