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The asset management industry provides for a massive potential to raise private capital for the fight against climate change – and, in particular, from retail clients. Going beyond financing, the asset management industry has the potential to become an active driver of changes in the real world of things when it comes to CO2 emissions produced or mitigated by real assets.
When the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) entered the surface of EU legislation, the whole financial industry had to work itself through the process of understanding the principles, impacts on products, processes, and financial models. The industry has seen an extensive need for sustainability advisors and the establishment of sustainability teams in-house. Two worlds had to make ends meet – sustainability professionals requiring higher standards to keep up with increasing environmental regulations and the world of total return. This was the turning point where EU regulation which has been pitied many times as self-absorbed by for example regulating a banana´s curve has set in motion real innovative processes. Apart from regulatory constraints, probably all industry leaders wondered whether investors would be willing to accept a decrease in return for the sake of sustainability if that would come along with it. For institutional investors, it is an active decision to spare basis points to meet the EU transparency criteria as ‘light green’ Article 8 or ‘dark green’ Article 9 products. However, in the retail sphere, the initiator takes the risk that investors are attracted by the product which depends on its design and management. The key is authenticity in structuring and managing an investment fund that claims to pursue an investment strategy targeting environmental tasks. Direct investments in real assets are more complex than liquid assets from an asset management perspective but are by far more comprehensible for the investor. Real assets are not chosen by algorithms and are at any time exchangeable by them. This increases credibility which might be relevant for the retail investor´s choice. Looking into the world of real estate asset managers, it became obvious that they started to improve their products and design new products incorporating sustainability goals. Many are still working their way through their portfolios analyzing the carbon dioxide emissions of each property in order to identify the potential for refurbishment or photovoltaic facilities. When acquiring properties, specific parameters concerning building materials and technical standards on energy efficiency have to be fulfilled. But the industry could make a further step in excelling current efforts by to some extent investing in land lots to become home to solar parks and wind farms which would be a multiplier for investments in and launching of renewable energy projects. The near future will show whether this becomes customary for property funds. Currently, there are only a few investment fund regimes available to retail investors which allow for direct investment in renewable energies. In contrast to equity funds including fungible securities by companies active in the renewable energies sector in their portfolios, real asset funds directly hold the title on a solar park or a wind farm with the intention to run the asset during its whole life cycle, which makes them a rather illiquid investment. This is the reason why national and EU policymakers have been reluctant to allow for such investment vehicles to be offered to retail investors. That was intended to be changed by the introduction of the European Regulation of European Long-Term Investment Funds (ELTIF) which opened the asset class “Infrastructure” to retail investors. Years after the regulation came into force; asset managers seeking opportunities to open illiquid fund strategies to retail investors have recently awakened the sleeping beauty. In fact, the vehicle is perfectly suited to satisfy the demand of retail investors for higher returns and to participate in the fight against climate change also in the investment arena. Why? It requires the funds to directly invest in portfolio companies operating infrastructure with a long-term investment horizon. Retail investors have a clear view of what their invested capital shall achieve and in today´s world; this is not only the return but very often also a sustainable purpose. Funds that directly invest in renewable energy projects set themselves sustainability goals such as the reduction of CO2 emissions. These funds have therefore been referred to as ‘impact funds’. Those products can stand out for their direct and transparent management approach to reporting on CO2 emission mitigation through the fund´s assets. This makes the products authentic and understandable for retail investors with the potential for large fundraising in the retail sphere. More disposable cash has the effect that more developers of renewable energy facilities get the chance to realize their projects. Hence, demand increases supply and directly reduce fossil energy. Such funds can hence be game changers in the fight against climate change. In addition, the size of an investment fund sets the ground for its liquidity management – a large retail fund can maintain liquidity management allowing for redemptions notwithstanding the illiquidity of its underlying assets. In times of rising interest, the funds´ size also enables the management to acquire assets at more attractive prices as they are not dependent on external financing and lower leverage protects retail investors. In consequence, the product does not bear considerably higher risks for a retail investor than other available financial products such as open-ended property funds but can deliver a major financial contribution to the fight against climate change. It is about time to introduce real assets to the retail sphere on a broader scale to exploit retail funds´ potential to trigger measures to reduce carbon dioxide emissions of existing assets and to fund new mitigating assets looking forward.
