Luxembourg's government and fund industry are fully intent on staking a claim to a significant share in the sustainable investment market, says Sachin Vankalas, operations officer at LuxFLAG, the organisation and label being used to identify suitable microfinance and environment funds.
Luxembourg’s government and fund industry are fully intent on staking a claim to a significant share in the sustainable investment market, says Sachin Vankalas, operations officer at LuxFLAG, the organisation and label being used to identify suitable microfinance and environment funds.
The LuxFLAG organisation is built to identify funds that deserve its label, but only after they meet strict eligibility criteria.
LuxFLAG is not meant to be seen as a label of convenience for managers claiming to offer access to sustainability. Any funds submitted for review must pass a series of checks and a panel of experts before being cleared by the LuxFLAG board to carry the label.
For example, it is not enough to claim to be following the UN Principles for Responsible Investment. The process is not designed as a “tick-box” exercise. Instead applications to the organisation will be checked against what is actually happening on a day to day basis, Vankalas said.
One example would be a fund investing in wind turbines. On the surface this would fit the eligibility criteria, but if the turbines were manufactured using child labour, then the case would fall down and fail the screening.
The eligibility criteria used by the review process include reliance on the “double bottom line” idea. This means that it is not enough to show that a fund and its strategy can make a return, but also ensure that it provides a “social return”. This is part of the idea that eligible funds should be able to show they can make returns in a responsible way.
Consistency of return is also important. “We want to see a track record,” Vankalas said.
He added that the fund itself would be more important than the company responsible for its manufacture, when measured against the eligibility criteria. This is because the LuxFLAG label itself applies only to the fund products, not the promoting company. That said, governance will be one of the issues looked at, for example, in terms of parent companies of asset management businesses.
|LuxFLAG Microfinance label key dates|
|Meeting of Microfinance Label Eligibility Committee||17 September|
|Meeting of board of directors||28 September|
|Final decision on labels||28 September|
|LuxFLAG Environment label key dates|
|Applications||31 August/ 19 November|
|Meeting of Environment Label Eligibility Committee||14 September/ 30 November|
|Meeting of board of directors||28 September/ 14 December|
|Final decision on labels||28 September/ 14 December|
Getting through the process from end to end takes about a month for both applications on behalf of microfinance funds as well as environmental funds, Sachin Vankalas said.
In the case of microfinance, the relevant fund company would have to contact LuxFLAG, deliver a file to the eligibility committee, which would then pass on its decision to the board of directors who issue the label.
For environment funds there is an additional layer of control consisting of a portfolio auditing report, which is sent to the eligibility committee. This is because environment investments tend to be more heterogeneous. The extra auditing layer provides and additional test of investor interests being met.
Vankalas said that having started with Europe based funds, the organisation earlier this year approved labelling of the first non-European one in the area of microfinance – the Access Africa fund, a limited liability corporation based in the US. LuxFLAG branding encompassed about half the estimated global microfinance sector, or AUM of about $3.5bn, he added.
Europe continues to account for the bulk of sustainable AUM globally, he suggests. But the initiative is not limited to funds domiciled in Europe. Nor is it limited to open ended products; it could also in future be applied to closed ended products, such as investment trusts in the UK.
“The type of structure doesn’t really matter,” Vankalas said.
Anecdotally, the areas of microfinance and environmental funds are attracting interest from investors, such as institutional investors, from a number of European markets currently, Vankalas said, suggesting the likes of the Netherlands and providers there active in the long term savings market – although LuxFLAG does not currently have official figures to comment. Again anecdotally, the UK seems interested in environmental funds.
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