As part of the European Commission’s reinvigorated attempt to promote future investment in key economic areas, it has now produced a legislative agenda for the long-term financing of investment.
This follows the long-term investment Green Paper, published towards the end of 2012, which looked to address a lack of funding in infrastructure, climate change, technology and innovation.
The Commission outlined its vision for long-term financing, with capital invested in productive activities that support growth and create jobs. Its preference leans towards investors who value long-term performance over short-term price fluctuations. In line with this, investors should be engaged, the Commission says, and account for long-term aspects such as environmental, social and governance issues.
Pension funds have the capacity to be “patient” investors, the Commission highlights, as it welcomes investors moving towards longer-term alternatives. However, it wanted more.
The Commission would create, alongside the revised IORP Directive and a new Shareholders’ Rights Directive, additional measures to promote long-term investments in the EU to funds, particularly infrastructure.
Its first proposed measure is to increase transparency of the infrastructure loan market. In its paper, the Commission calls for EU member states to publish infrastructure investment plans and create a central database holding credit information on infrastructure loans.
The transparency model the Commission wants would be based on one used in the UK banking sector. The Default and Recovery Rates for Project Finance Bank Loans, run by Moody’s since 1983, resulted in a consortium of banks pooling anonymous information on infrastructure loans. This exchange of information has now covered more than 50% of all project finance transactions since then.
This has led to a much greater understanding of risk profile among lenders, says David Cooper, executive director for European debt investments at IFM, a not-for-profit manager owned by a consortium of Australian funds. Cooper, who spent time in the banking sector, says this move would really benefit pension funds’ understanding of the risk/return profiles of the sector. “It’s absolutely what’s needed in my view. Infrastructure debt is a great asset class, but it’s sometimes hard to evidence that statistically.”
The Commission says it will look into
the feasibility of such a platform this year, and that it wants to see a collection of comprehensive and standardised credit statistics on infrastructure debt. Further to this, the proposed new IORP Directive would remove the draconian right of national regulators to restrict investments in risk assets. This, the Commission says, dismantles an unnecessary barrier to financing the real growth of the EU economy.
Restrictions placed by regulators, for instance in Germany and Austria, limit a fund’s exposure to risk assets, commonly equities, but also collateralised debt. Infrastructure debt, due to the way it is structured, often falls into this category. This has been seen as hampering many European pension funds’ moves to invest in long-dated assets.
However, while pension funds may welcome additional transparency and relaxed restrictions, in the back of the mind will be memories of the difference between draft legislation of IORP I, and the actual implemented law.
Europe seems strongly committed to development and facilitating long-term investment, but pension funds must still wait to see whether the Commission has ‘walk’ to add to its ‘talk’.