The longstanding ties between Dutch asset management industry and Luxembourg’s fund services sector are coming into sharper focus as the investment industry continues its rebound from the disruption prompted by the onset of the Covid-19 pandemic last spring, according to speakers from both jurisdictions at the ALFI Digi Pulse Amsterdam – for now continuing the association’s series of virtual events – on May 20, which attracted more than 200 participants.
The demand by Dutch asset managers for sophisticated and innovative products and investment solutions is a key element of the relationship, according to ALFI Director General Camille Thommes. While products set up by Dutch asset managers account for 2.3% of AuM in Luxembourg – some EUR 120bn – no fewer than 3,700 funds domiciled in the Grand Duchy are distributed in the Netherlands.
Mr Thommes notes that the strong focus among Dutch asset managers and investors on responsible investment dovetails with Luxembourg’s priority, shared by the financial services industry and the political authorities, on sustainable finance – but the adoption of the European Union’s Sustainable Finance Disclosure Regulation represents a major challenge, argues Iris van de Looij, his counterpart at the Dutch Fund and Asset Management Association.
She says the industry has had to cope with a “terrible, costly implementation process” because of delays in finalising detailed secondary-level rules under the SFDR, noting that the association’s efforts to work out feasible implementation approaches with the authorities have to be carried out “under the radar” to avoid giving the impression that the asset management industry is seeking to stall sustainability initiatives.
The first phase of SFDR adoption, comprising the classification of funds according to the role played by sustainability goals in their investment aims and the updating of prospectuses, was due by March 10, according to Gast Juncker, a partner at law firm Elvinger Hoss Prussen. He says asset managers are now adapting new sub-funds to the draft regulatory technical standards that are due to apply from the beginning of 2022.
“They are looking to provide the maximum disclosure possible and pre-empt the RTS as far as possible,” Mr Juncker says. “But the process of finalising EU taxonomy-related disclosure requirements is still ongoing.” With the new year-end deadline already starting to approach rapidly, he says Luxembourg regulator CSSF is again considering a fast-track process for disclosures, as it did earlier this year for updating prospectuses.
Some asset managers are well advanced in their preparation for the EU rules because they have a longstanding focus on sustainable investment. Rob Radelaar, a client portfolio manager for sustainable investing at Robeco, says it is “business as usual”, with 85% of the group’s funds classified as ‘light green’ under the SFDR’s Article 8 and a further 10% explicitly targeting sustainable objectives under Article 9.
Mr Radelaar says the problem of gaps in sustainability data, a major industry concern, are nothing new: “We have encountered a lot of inconsistencies in data and blanks over the past 10 years. Although there is more consistency now on carbon emissions, in other areas is can be difficult to get the right level of detail, and we sometimes have to rely on estimates. We also need more clarity from companies under the EU’s Non-Financial Reporting Directive.”
While institutional investors are increasingly focused on and expert in sustainability issues, Mr Radelaar says that in providing information to retail customers, gatekeepers must play a key role: “They won’t read the prospectus – it’s up to distributors to explain it in layman’s terms.” And he notes that the EU sustainability legislation may have a wider impact: “Clients in Asia and the US are watching very carefully what’s happening in Europe. We hope it may set a standard for the global industry.”
One of the fastest-growing areas of Luxembourg’s fund industry is real estate investment, notes Roderigo Delcourt, a partner with law firm Arendt & Medernach. Although the sector accounts for around 2% of the country’s regulated fund assets, they have risen from around EUR 50bn in 2016 to EUR 93.4bn at the end of the first quarter of 2021 – and the total excludes the large but unquantified volume of assets held within unregulated structures.
ESG is also an important consideration for both tenants and investors in logistics real estate, according to Gert-jan Meerkerk, head of the Luxembourg office and of fund management at Prologis. “The shift toward sustainability is seen in the installation of solar panels on the roofs of logistics properties, and the drive to achieve carbon neutrality, not just in Europe but globally,” he says.
Real estate funds have been at the centre of concern about valuation and liquidity over the past year, but Mr Meerkerk argues that communication has proved critical in the management of real estate assets as well as funds.
“Our property managers have been reaching out to tenants to find out how their operations are holding up, offering help and seeking to anticipate problems – of which fortunately there have not been many,” he says. “At the same time, we have kept investors updated, notably regarding rent collection.”
Mr Meerkerk says change lies ahead for logistics investment, which until the pandemic was largely shaped by just-in-time delivery and low stock levels. The disruptive impact of Covid-19 on supply chains – and the temporary blockage of the Suez Canal by an errant cargo vessel – could lead to a reconfiguration involving higher stock levels and requiring increased warehousing space.
“This is likely to boost demand for modern and efficient warehouses located near the end-consumer, as with Amazon’s same-day delivery approach,” he predicts.
Real estate fund structures have evolved and become more complex over the past 20 years, Mr Delcourt notes, pointing to the trend toward creating not only a main fund but parallel vehicles in other jurisdictions, feeder and co-investment funds. Mr Meerkerk also points to the expansion of regulatory scrutiny through the EU’s AIFMD legislation a decade ago and the CSSF’s circular 18/698, introducing additional requirements and reporting obligations. And, he says, the industry has had to adapt to new legal provisions affecting investors, such as the Solvency II requirements for insurance companies.
Private equity funds have arguably been one of the biggest success stories in Luxembourg’s fund industry over the past decade, with firms increasingly setting up asset management and back-office operations as well as investment vehicles in the Grand Duchy, says Pieter Leguit, the local partner in Amsterdam of law firm Loyens & Loeff.
EQT Partners, which has EUR 33bn in private capital assets under management and EUR 24bn in real assets including infrastructure, headquartered in Stockholm but with offices in 24 countries around the world, took the decision in 2017 to create a single hub for its funds in Luxembourg, according to director Marie Louise van Dam. Describing the Grand Duchy’s special limited partnership structure as the “go-to private equity fund vehicle”, she says EQT chose Luxembourg because of its comprehensive fund tool kit, one-stop shop for expert services and stable environment.
Like other organisations, EQT has faced a test of its resilience and adaptability of the past year of pandemic restrictions; Ms van Dam says the company was able to respond smoothly to the closure of all its offices in March 2020 because staff were already equipped to work anywhere. One of the most important challenges, she says, has been focusing on the mental wellbeing of its employees – “This is not temporary, our employees are super-important to us.”
Technology was also the key to the response to the pandemic at NN Investment Partners – “it kept the show on the road,” says head of business implementation Edward Wierenga. “It also underlined the importance of data, or flexible, sustainable and responsive solutions, and for smarter and faster services.”
He says the asset manager’s search for operational excellence has focused on simplification and standardisation, enabling it to manage different asset classes on the same Aladdin IT platform, although persuading distributors to abandon the fax machine and e-mails for SWIFT communications has proved a long process. But Mr Wierenga says the pandemic period has seen important breakthroughs, not just online meetings but the embrace of electronic signatures.
For the Dutch asset management industry and its Luxembourg partners, it’s no surprise that the past 12 months should have seen significant changes in investment focus, operational processes and regulatory requirements. Sustainability issues and their impact across the industry’s activities are already taking centre-stage; the pandemic has simply given the process additional impetus.