What is the best domicile for a fund engaged in responsible investment given recent events?
Given a choice, would you rather be domiciled in France, with its new energy transition law and leadership of COP21? Or Luxembourg with its LuxFLAG ESG ratings system? Or Ireland, which is making a play for the green euro/pound with its ‘Sustainability Nation’ initiative?
Elsewhere, Germany is pairing with Novethic on an ESG fund rating system. At the heart of all this is Europe’s highly successful UCITS [Undertakings for Collective Investments in Transferable Securities] system.
UCITS provides a single European regulatory framework – meaning it is possible to market across the EU without worrying about the domicile. Marketed under UCITS are collective investment vehicles like SICAVs and OEICs (formerly known as unit trusts).
But the UK populace has voted to withdraw from the EU – putting its role in the €12trn European funds industry into doubt.
At the time of writing, it is unclear how this will ultimately affect fund “passporting” – but this lack of clarity alone will be very damaging for London. Already, some firms such as Columbia Threadneedle and others have said they plan to expand operations in Luxembourg. Although only likely to be on the asset servicing, and not the investment, side – it could be a foretaste of things to come.
It comes as the City of London is making its own sustainable investment push with the Green Finance Initiative (GFI) headed up by former Lord Mayor of London Sir Roger Gifford.
Gifford, the UK head of Skandinaviska Enskilda Banken, was a ‘Remain’ supporter, telling an event earlier this year: “Open borders and co-operation are the way to achieve a low carbon economy.”
The GFI was launched with the backing of the UK Treasury, the Department of Energy & Climate Change and the City of London Corporation.It was incubated alongside the UN Environment Programme’s high-level ‘Inquiry: Design of a Sustainable Financial System’.
But the UK is now in political turmoil, and green finance will not be a top priority in the immediate future. Brexit has raised concerns about the sale of the Green Investment Bank.
In an interview with RI after the GFI’s launch, Gifford said: “We welcome working with other capitals such as Paris, Luxembourg and elsewhere on building green finance capacity. We want them all to develop strongly.”
That sentiment is clearly undermined, perhaps fatally, by the referendum result. Indeed, Responsible Investor understands that London’s rivals are already being approached by London-domiciled funds in the responsible investment space.
Besides UCITS, there are other fund structures such as the new ‘patient capital’ European Long-Term Investment Funds (ELTFs) and social investment vehicles, EuSEF. Then there are the opportunities offered by Capital Markets Union to fund renewable infrastructure.
Again, with the caveat that we don’t know yet what compromises will be made about the UK’s future access to the internal market, UK funds could be limited in benefiting from – and contributing to – these positive developments.
In the immediate wake of the referendum result, the Investment Association (IA), the UK’s fund trade body, said it was important “that we adopt a collective long-term focus on how the UK can preserve the pre-eminence of its financial services sector including our highly successful £5.5trn asset management industry – the second largest industry of its kind in the world”.
But with some asset managers already looking for the door, certainly in the RI space, the UK funds sector will have to pull out the stops to stop a trickle becoming a flood.