EU’s SFDR sustainability framework remains a “work in progress” for many fund managers

ESG metrics

The implementation of ESG metrics for regulated funds under the EU’s sustainability-focused SFDR framework remains a “work in progress” for many hedge funds and other asset managers, according to fund structuring and governance service provider Waystone.

Waystone, which formally launched earlier this year following a merger between DMS, MontLake and MDO, partners with institutional investors, investment funds and asset managers, and supports funds with regulatory governance and structuring requirements across multiple jurisdictions.

“We work with all types of institutional clients who have increasingly complex needs and look to provide bespoke and tailored solutions, and as a group we work very closely with our asset managers in structuring hedge funds, no matter where their investors are based and what their needs are,” Vanora Madigan, executive director, told Hedgeweek this week.

With sustainability investing and environmental, social and governance (ESG) indicators gaining momentum across the global hedge fund and asset management spectrum in recent times, ESG metrics have been a key area of focus for Waystone this year.

Madigan observed how the implementation of the EU’s Sustainable Finance Disclosure Regulation (SFDR) – which seeks to further clarify for end-investors the sustainability credentials of all regulated funds within the bloc’s scope, proved a “huge exercise” for the industry ahead of its March 2021 implementation date.

“A lot of our clients are on different journeys when it comes to integrating sustainability as part of their investment decision-making process,” she said. “It’s a work in progress and there is still a lot more that will need to be done in terms of fund documentation and managers becoming compliant, with SFDR Level 2 requirements and the Taxonomy Regulation to be implemented, but that journey has begun for the industry.”

With funds classified as either article 8 (‘promote ESG characteristics’) or article 9 (‘have ESG as an explicit objective’) under the framework, Waystone worked closely with managers in terms was required ahead of the March implementation date.

“A lot of our role there was about educating clients, particularly non-European clients who might not be so familiar with the European requirements – for example, evaluating and considering the strategy type, what they were looking to achieve, whether it was an ESG fund or not, and assisting them with making that classification for the fund, and what the integration of sustainability risk would look like for them in order to become an ESG fund going forward,” she added.

“What we are seeing now in our pipeline for fund launches is more ESG funds, article 8 and article 9 types funds, being launched than previously.”

Now serving assets of more than USD1 trillion, Waystone has more than 20 years’ experience in providing institutional governance, risk and compliance services to the asset management industry globally.

In July, the firm received significant investment from Montagu Private Equity, a leading European private equity firm, to accelerate its global growth strategy.

“What we’re seeing, not just from our hedge fund clients but across the asset management industry, is that clients want a comprehensive regulatory solution across all core markets and domiciles,” Madigan said.

“Rather than go to five or six outsourcing partners and trying to manage those relationships, managers want a provider which has multiple regulatory licenses, across MiFID, UCITS and AIFMD, with experienced management teams to be able to be that one-stop-shop fund provider with the required infrastructure and architecture.”

She added: “There is a huge growth in the third-party management company sector. We see over the next few years a lot of consolidation in the market in terms of asset managers deciding whether to continue to run proprietary ManCos internally or outsource to a third party management solution, and large part of that is the ability to support regulated funds and increasing regulation coming down the tracks.”

Meanwhile Paddy Governey, head of management company services, said that for hedge funds and other asset managers entering a regulated domicile, understanding the expectations of the regulator remains key.

“Certainly in Ireland and in Luxembourg, there are costs involved, and those costs are inescapable,” Governey said. “We try to keep those costs as low as possible and to establish robust solutions. We share the knowledge we have built over the last 20 years with managers to allow them to make informed decisions.”

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Hugh Leask
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