Jonathan Williams asks whether the European Long-Term Investment Fund will live up to the hopes of the socially responsible investment community
Europe, despite its sizeable institutional investment market, lacks patient capital – or so the narrative goes. In an effort to attract capital that will stay with projects for the long term, the European Commission in 2013 unveiled the European Long-Term Investment Fund (ELTIF) as a way of directing money towards the real economy. The hope, at least within the environmental and social investment community, was that the new vehicle would have responsible investment concerns hard-wired into legislation. Yet, two years later, the European Parliament passed an act that is bereft of an environmental heart.
The ELTIF itself, designed well before president Jean-Claude Juncker’s eponymous €315bn investment plan was announced, has since been co-opted by the initiative, with the Commissioner for financial stability, Jonathan Hill, also pointing to the fund as the first step towards a Capital Markets Union (CMU).
Hill previously expressed hope that the ELTIF would allow smaller pension funds to access projects that would require benefits of scale. “This is why we believe the ELTIF will make a true difference,” he told IPE in March. It clearly remains an important part of the European toolkit, which makes the absence of any environmental, social or governance (ESG) regulation all the more vexing.
“We are feeling very disappointed such a tool, pushed for by the European Commission, should not incorporate these aspects,” says Gwenola Chambon, head of infrastructure funds at Mirova. “If you want to encourage long-term investment, you’ve got to take into consideration the concrete impact you will have on the environment and the social aspects.”
Calls for ESG to be in the ‘DNA’ of the fund, as Chambon says, started in 2012, even before the formal ELTIF proposal was made. Eurosif, the Brussels-based umbrella association for responsible investment groups, suggested as much when investment restrictions of a possible new fund were being considered.
The association, rather than modify the existing UCITS framework to be more long term, came out in favour of a new fund and remarked: “Within these frameworks, long-term products should also be required to incorporate ESG concerns, since these have a long-term effect on portfolio risk and return.”
But François Passant, executive director at Eurosif, is unwilling to concede defeat just yet, noting that “another opportunity” remains to influence the undrafted secondary regulation as part of the CMU consultation. “Eurosif is working on this and insisting ELTIFs incorporate some eligibility criteria along these lines.”
Jeff Rupp, director of public affairs at the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), notes the resistance in some quarters to stringent ESG requirements. “There is a definite school of thought that the more requirements they layer on, including ESG requirements, [the more] it creates an extra barrier that could lead to less capital flowing in.” He says the Commission and MEPs tried to “strike a balance” in the drafting of the law, a view shared by the International Capital Market Association (ICMA).
The only mention of ESG within the legislative text is that the real asset holdings should “give rise to economic or social benefit”. It also accepts that all projects receiving long-term funding should help with the EU’s objective of “smart, sustainable and inclusive” growth.
“At the end of the day, if there are no projects launched by the member states, then it [the ELTIF] will not serve for anything”
Even without explicit ESG criteria, it is still probable the ELTIF can help attract funding to the market. The ICMA’s director of regulatory policy, Patrik Karlsson, points to rail projects, housing and hospitals as possible recipients of ELTIF funding. “A lot of long-term assets have social benefits, purely by being long term.”
Governments will now need to tackle tax incentives to attract institutional capital, but regulatory hurdles also remain.
Chambon also argues the European Insurance and Occupational Pensions Authority (EIOPA) should grant the ELTIF “special treatment” to prevent regulatory capital requirements from deterring prudent and patient capital. She notes that, because the fund has to hold assets that match its lifetime, it will often see infrastructure investments deployed towards private finance initiatives or public/private partnerships. “[These] are probably the lower range of risk of infrastructure, which again makes a case for defining a special treatment under Solvency II.” Additionally, she says, the nature of the ELTIF will be a buy-and-hold strategy devoid of leverage, reducing risk to the investor even further.
EIOPA concluded a consultation on the treatment of infrastructure under Solvency II in late April. That the supervisor is reassessing these metrics can only be regarded as a good sign for those in the pensions industry who worry that regulation will hamper their ability to invest in the real economy.
Chambon nevertheless remains upbeat, noting that asset managers will still be able to offer ELTIFs that consider social or environmental concerns. She adds that Juncker’s investment initiative is forcing people to rethink structures, with major actors, such as the European Investment Bank, able to offer expertise in ESG matters to the market.
“It is true there is a lot of money out there willing to invest in infrastructure,” she concludes. “But at the end of the day, if there are no projects launched by the member states, then [the ELTIF] will not serve for anything.”
In the end, that is the main concern, ESG-friendly or not. Despite the Juncker Plan’s focus on kick-starting the economy, it has yet to prompt member states to unveil infrastructure projects investors have not seen before. The ones that remain may be of interest to national governments, but they have so far failed to whet pension funds’ appetite, ELTIF or not.