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Adapting and responding to change

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By A Paris – Uncertainty remains the order of the day as the world heads into a period of slow recovery which risks being scuppered by a variety of factors including the US elections, trade tensions and the prolonged impact of the Covid-19 pandemic. Financial services practitioners in Luxembourg, like their peers in other jurisdictions, have had to navigate this volatile environment while continuing to provide a seamless service to clients.

“The crisis has been a strong accelerator of change by spotlighting our resilience, as well as our ability to adapt. While organisations are considering how to accommodate working from home to a greater extent, the reduction of face-to-face contact may in turn have a detrimental impact on collaboration, connectedness and productivity. To that end, the need for support in this profound cultural change should not be minimised,” details a report published by the Digital Banking and FinTech Innovation Cluster of the Luxembourg Bankers’ Association (ABBL) and KPMG Luxembourg. 

Although much in the world has obviously changed, ALFI chair Corinne Lamesch told delegates at the organisation’s virtual conference that following the initial Covid shock in February and March, total assets under management in Luxembourg rebounded to EUR4.6 trillion at the end of July, approaching the all-time peak set in January. “At least for now, Luxembourg’s role as the world’s leading cross-border fund centre remains unchallenged,” she said.

Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier (CSSF) has played a significant role in supporting the funds industry through the crisis. For example, certain deadlines were extended and new measures were brought in to permit firms to hold shareholder and management body meetings of exclusively in digital form.

AIFMD review

It has been nine years since the Alternative Investment Fund Managers Directive (AIFMD) was first published and seven since it was passed into law. In this time Luxembourg has witnessed growth in the alternatives arena as it set up structures to support managers in complying with the new regulation.

However, some element of change may be afoot. In a letter to the European Commission, Steven Maijoor, chair of the European Securities and Markets Authority (ESMA) identified topics which should be addressed in the EC’s review of the AIFMD.

Greg P. Norman, Counsel, Investment Management, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates comments: “Of the 19 reform areas listed by ESMA, the proposed changes relating to delegation and substance stand out as the most controversial due to the highly disruptive impact that they could have on the well-established delegation and host alternative investment fund manager (AIFM)  models.”

At the ALFI conference, Luxembourg’s finance minister Pierre Gramegna and the CSSF’s Claude Marx and Marco Zwick joined industry members in warning against hasty changes to a model that has served Luxembourg’s and Europe’s fund industry well over the past three decades.

Growing ESG demand

Another factor Luxembourg players need to contend with is the growing appetite for sustainability and environmental, social and governance (ESG) both from an investment point of view and also on a policy dimension.

Luxembourg for Finance, the jurisdiction’s development agency writes: “Luxembourg is constantly expanding its toolbox of products and services designed to promote investment into green and sustainable projects and to help bring sustainable finance into mainstream.”

In testament of this, in September, the Grand Duchy became the first European country to launch a Sustainability Bond Framework. The innovative framework is also the first in the world to fully comply with the new recommendations of the European taxonomy for green financing.

Revenues obtained through these bonds will be invested by the government in new sustainable projects, such as the construction of green housing, the energy transition, the development of low CO2 emission transport or more efficient water management, or to refinance existing loans should they meet the criteria. The proceeds will also be used to finance social projects in sectors such as health, education, affordable housing or the labour market.

For asset managers and service providers, the growing focus on ESG by policy makers often translates into increased reporting and compliance measures. The Luxembourg Stock Exchange outlines: “Multiple companies would like to meet this demand [for ESG], but struggle to define the right ESG approach and methodology and establish proper ESG reporting procedures.” In support of the industry, the exchange published a set of comprehensive guidelines for reporting on ESG aspects.”

The asset management industry itself is said to be forerunning regulations around ESG as it responds directly to investor demand. In an article on the firm’s website, Eric Borremans Head of ESG at Pictet Asset Management, notes: “ESG is a technique for enriching traditional analysis. It is misleading to think in terms of ‘ESG compliance’.” His words warn against a tick-the-box attitude to ESG, suggesting a more integrated approach.

CVC Capital Partners, one of the largest managers in Luxembourg advocates this as well. The firm, which has more than USD80 billion under management across private equity and credit, fully integrates ESG considerations into its approach to creating value across its investments.

In a keynote interview, CVC ESG director Chloë Sanders notes: “More recently I’ve observed a significant increase in interest and depth of understanding of ESG topics. Those investors interfacing with us on ESG are sophisticated and are asking for far more detailed information about portfolio companies, wanting to understand more about our overall approach to the big global challenges. 

“A lot of that comes from obligations in respect of their own ESG commitments. As long-term signatories to the PRI and more recently as a member of the PRI Private Equity Advisory Committee, we are actively involved in the finance industry’s dialogue on these topics.” n

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