A European ESG classification that’s proved too strict for many of the world’s biggest asset managers has just been embraced by a hedge fund manager in London.
(Bloomberg) — A European ESG classification that’s proved too strict for many of the world’s biggest asset managers has just been embraced by a hedge fund manager in London.
Trium Capital LLP, whose ESG Emissions Impact Fund outperformed 96% of peers last year, has launched a long-short strategy it says will be green enough to merit the European Union’s top environmental, social and governance designation, known as Article 9.
The Trium Climate Impact Fund (ticker TRCIMDE ID) has been designed to meet investor demand for a market-neutral Article 9 product, Joe Mares, co-portfolio manager of the fund, said in an interview.
“We are trying to generate alpha through the long side, through picking stocks that we believe are environmental solutions leaders that can significantly outperform the market and the peer group,” he said. “And then we are using the short side to try to reduce volatility in that process and reduce market fluctuations.”
Asset managers have started approaching Article 9 with trepidation, after the fund class became the scene of mass downgrades late last year. Firms including BlackRock Inc., Amundi SA and Axa Investment Managers SA stripped the tag from well over $140 billion in combined assets after the European Union made clear that only 100% sustainable investments could carry the classification, with some allowance for hedging and liability.
Even after EU clarifications, market participants don’t all agree on what can go into an Article 9 fund, and many are still waiting for European regulators to signal what they’ll tolerate in practice. That’s as rules take effect this year requiring funds to provide more granular, quantitative documentation around their ESG statements.
“If you are an ESG fund, and certainly if you’re an Article 9 ESG fund, it’s better to underpromise what you’re doing because there’s been a lot of overpromising,” Mares said.
Meanwhile, there’s evidence that few portfolios actually comply with the EU’s strict requirements. In fact, a third-quarter review by Morningstar Inc. showed that less than 5% of asset managers met the 100% sustainable investment bar.
Against that backdrop, all Article 9 claims are now being scrutinized closely as asset managers try to figure out how their peers are interpreting regulatory signals.
Trium says its Article 9 fund targets 100% in sustainable investments in the long portfolio, but guarantees a minimum of 90%.
Because the fund is starting out as a small, daily-dealing UCITs product, “I’m not sure how anyone can actually guarantee a hundred,” Mares said.
Trium’s Article 9 Fund…
The fund has the scope to reach €1 billion, Mares said. Investor conversations to date suggest it could start out with about €50 million this spring after opening for client cash, he said.
The fund’s investment universe is mostly in Europe and North America, though it’s also exposed to Asia and Latin America. The long holdings are comprised of roughly 50 stocks. There’ll be “many more” short positions, though these will be smaller and in indexes as well as individual equities, Mares said.
The fund targets a minimum of 15% in taxonomy-aligned investments. By comparison, Morningstar estimates that just 2% of Article 9 funds targeted alignment rates of more than 10% in the third quarter. Mares said Trium’s alignment rate is likely to increase over time as the regulatory landscape becomes more complete.
Article 9 funds are defined within the EU’s landmark anti-greenwashing rulebook, the Sustainable Finance Disclosure Regulation, which was enforced in March 2021. SFDR, which applies to all fund managers marketing to EU-based clients, will be opened to a consultation process early this year after Mairead McGuinness, the bloc’s financial markets commissioner, acknowledged it might be in need of an overhaul.
“We may need to take a much broader look at this regulation,” she told lawmakers in early December. And if efforts to address confusion around SFDR fail, then the EU may need to embark on a fundamental rewrite of the regulation, McGuinness said.
In the meantime, industry insiders are voicing misgivings. Fund managers such as Allianz Global Investors have complained that continued adjustments to the EU’s regulatory guidance have left staff frustrated. And Europe’s main retail investor association has expressed concern to the European Commission that fund downgrades may have exposed members to greenwashing.
For hedge fund managers, SFDR has proved particularly challenging. Industry associations have characterized the regulation as lacking proper guidance around short-selling, leaving managers wondering how to ensure their reading of the rulebook won’t land them in trouble.
For Trium’s short holdings in its Article 9 fund, “the primary goal is to reduce volatility,” Mares said. “Clearly, if we believe we can also do that in a more intelligent way, both from an alpha generation and from an ESG perspective, we will do that.”
Anna Maleva-Otto, a partner at Schulte, Roth & Zabel LLP who advises alternative asset managers mainly in the UK and the US, said that as a rule, “all underlying investments in Article 9 funds must qualify as sustainable investments,” as defined in SFDR. The mix between longs and shorts “is a matter of disclosure,” she said. For now, SFDR doesn’t contain “any specific instruction for how derivatives should be treated,” the EU’s markets watchdog, ESMA, noted in November.
Like other asset managers trying to interpret SFDR, Trium has run its decisions past lawyers who specialize in the rulebook. It’s also received authorization from the Central Bank of Ireland, where the fund is registered.
“If the regulators say that no shorting is allowed whatsoever in an Article 9 product, then we’ll approach that situation when it occurs,” Mares said.
Trium has “just assumed that the short side gets no credit,” he said. The idea being that the fund should target 100% sustainable investments, “except for liquidity and hedging purposes. And the short side is for hedging.”
–With assistance from Frances Schwartzkopff.
(Updates with Trium’s target for taxonomy alignment in fund fact box)
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