Don’t wait for regulators to enforce SBTs

The Luxembourg fund market has grown substantially over the last decade with combined assets under management hitting an all-time high of €5.9 trillion at the end of 2021.

The strong regulatory environment and an increasing focus on sustainability makes it an attractive jurisdiction for traditional and Alternative Investment Funds (AIFs). With this market sophistication comes greater scrutiny of fund’s ESG credentials, however.

Investors and regulators increasingly want to see that a fund is taking tangible steps towards net zero goals in line with the Paris Agreement. This is a key driver to adoption of science-based targets (SBTs), our recent report revealed, which are poised to become the leading framework to guide AIFs.

While SBTs remain voluntary, Nathan Mistry, Director at RBS International Luxembourg, says that fund managers should not wait for a regulatory push — there are many benefits to beginning SBT conversations today.

What kind of conversations are you having with clients around SBTs?

In Luxembourg, everyone references ESG and there is a widespread awareness of SBTs among Luxembourg-based funds but their ability to adopt them – or other frameworks – really depends on the sector and sophistication of the fund and their resources. This also came out in our report when talking to funds in different sectors.

Have any local funds adopted SBTs or had their targets validated?

I've seen a handful but I’d say that it’s outside the comfort zone of many fund managers. We saw that more widely in our report, with 58% of funds surveyed saying they don’t have validated targets. That said, the better managers I see are trying to look at different ways to invest sustainably in their sectors so I think some are starting to think a little bit more outside of the box.

Do you think regulation will help some funds to adopt SBTs?

Regulation should be a pull rather than a push factor. First, ESG needs to be embedded as part of a fund’s strategy. Resource is also a challenge, something that came out loud and clear in our report.

What’s the wider ESG talent landscape like in Luxembourg?

You don’t see people in the industry with long-term experience in this field because it's quite new. In the future, I think resourcing ESG teams to implement something like SBTs will have to be a blend of training people internally, because those are the people that know the fund processes and the operations, and then bringing some expertise from outside and seeing what other industries and other fund managers are doing and combining the two. Banks and service providers have a role to play, too. It's about sharing best practices.

What benefit would SBTs bring to AIFs in your jurisdiction?

It’s about instilling a long-term view in fund managers that action taken today will benefit their resale value in the future and that’s ultimately what motivates the industry. Whether they’re using SBTs as a framework, or something else, the returns would probably be higher on assets with strong sustainability credentials.

I don't think that is very clear in current returns forecasts and valuations today but it’s a mentality many should adopt. In our survey, we saw that reputation and resilience were cited as the top benefits to adopting SBTs amongst funds.

What impact is the current economic environment having on funds’ ability to look at SBTs?

I think what happens when there's such a difficult macro environment is that ESG is put to the side. For funds it's about keeping it front and center and thinking ‘if this is really part of our purpose and our culture, this is one of the things that really shouldn't get deprioritised’.

What next steps should funds take?

Lots of funds are nervous about climate disclosures because their targets are not perfect. Being comfortable with that and just starting the journey gives you that confidence to keep going forward. Don't be shy to say that you're not sure and talk to banks and intermediaries who are further along in the process. The action plan in our SBT report — Pressure is mounting ­— offers manageable steps and breaks the process down.

You can read the full report here.