AGEFI Luxembourg - Mai 2022

AGEFI Luxembourg 20 Mai 2022 Fonds d’investissement A t the annual general mee- ting of the Luxembourg Stock Exchange (LuxSE), on 11 May 2022, the shareholders of the exchange appointedAlain Kinsch to LuxSE’s board of direc- tors. Alain Kinsch was subse- quently elected as Chairman by LuxSE’s board members and takes over from FrankWagener. FrankWagener has acted as Chairman of the board of direc- tors of LuxSE since 2011 and an- nounced his plans to retire from this position last year. “It has been an honour for me to be the Chairman of the Luxembourg Stock Exchange for the past 11 years and closely follow the company’s suc- cessful journey, marked by its gro- wing international footprint, its pio- neering role in sustainable finance and digital innovation. With his impressive professional career, and his in-depth knowledge of the Luxembourg finan- cial centre and the needs of internatio- nal clients, I am confident that my suc- cessorAlain Kinschwill bring comple- mentary expertise and a freshmindset to the board and provide support to CEO Julie Becker and her leadership team,” commented Frank Wagener, outgoing Chairman of the board of directors of LuxSE. Unique experience Alain Kinsch is serving on the board of several national and international com- panies as an independent director and is Vice-President of the Luxembourg State Council. He is well known for his highly successful tenure at EY, where he was the Country Managing Partner of EY Luxembourg from 2009 to 2020. Speciali-sing inprivate equity, he served as EY’s Private Equity fund leader for Europe, Middle East, India and Africa in the same period. Alain Kinsch is also the co-founder of the Luxembourg Private Equity & Venture Capital Association (LPEA). “It is a privilege for me to take over as Chairman of the board of directors of the Luxembourg Stock Exchange. With its central position at the heart of the financial ecosystem in Luxembourg coupledwith its international reach and its ability to stay ahead of the curve, the Luxembourg Stock Exchange has contributed greatly to the development of our financial centre, an objective I have personally been committed to for the past 25 years and look forward to pursuing in the new role,” statedAlain Kinsch, the newly elected Chairman of the board of directors of LuxSE. Strong financial performance At theAGM, LuxSEpublished its finan- cial results for the financial year ending on 31 December 2021, reporting record growth. The Luxembourg Stock Exchange Group, which consists of LuxSE and its wholly owned subsidiary Fundsquare, reported consolidated revenues of EUR 55.4 million for the financial year 2021. This represents a revenuegrowthof 8.1% compared to the previous year. The group also reported a net profit of EUR 13.5 million, up 20.5% from 2020. The strong financial performance in2021was driven by a considerable growth in the number of new listings. In the course of 2021, LuxSEwelcomed12,687newsecu- rities on its markets and on the LuxSE SecuritiesOfficial List, up17%compared to 2020. This makes 2021 the strongest year for LuxSE in terms of new listings since 2008. At the end of 2021, LuxSE reporteda total of 37,839 listedsecurities, up 2% compared to 2020. “After a challenging 2020marked by the pandemic, economic activity picked up across the world in 2021, and this was reflected on the Luxembourg Stock Exchange. We saw a considerable increase in listing activities on our exchange last year and this resulted in a strong financial performance. 2021 was also a record year for sustainable finance, both globally and on LGX, and we continued to contribute to the trans- formation of finance through new pro- ducts and services. 2022 is likely to be marked by a challenging geopolitical and economic context and the war in Ukraine, and this makes our focus on the increasingly urgent green and digi- tal transitions even more important,” explained Julie Becker, CEO of LuxSE. Highlights of 2021 2021 was a year of milestones for the Luxembourg Green Exchange (LGX), the world’s leading platform for sustai- nable securities. LGX reached the 1,000 sustainable bonds mark in May and marked its 5 years of existence in September. LuxSE developed the plat- form further by adding a section for Climate-Aligned issuers, which features companies that derive at least 75% of their revenues from environmentally friendly activities. The exchange also revamped the existing fundwindowon LGX to reflect the fund classification brought by the Sustainable Finance Disclosure Regulation (SFDR). In terms of its focus on technology, LuxSE conti- nued to invest in tech start-ups and completed the first, fully digital listing via the Origin platform. LuxSE reports record results for 2021 - Alain Kinsch new Chairman froml.tor.:AlainKINSCH,newlyelectedChairmanoftheboardofdirectorsofLuxSE,JulieBECKER, CEOof LuxSE and FrankWagner, outgoing Chairman of the board of directors of LuxSE©LuxSE Dataisattheheartofthetransformation By Dario ZAMBOTTI, Director, Deloitte Luxembourg and Raul GARCIA- RODRIGUEZ, Director, Deloitte Czech & Slovak Republics T he real estatemarket has al- ready begun to address envi- ronmental, social, and governancematters frommany myriad angles: adopting different strategies, seeking different posi- tioning, and serving investors’ dif- ferent needs. The application of both the Sustainability Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation have driventhelong-termfocusonESGpillars. However, ESG regulations are only one force pushing the industry to reshape; stakeholder requests and their impact on the entire value chain cannot be ignored. SFDR focuses on disclosures and trans- parency, so the most important require- ments are about the ways sustainability risks are considered in an investment de- cision; the fund classification noting ESG objectives and characteristics; and princi- pal adverse sustainability impact report- ing. When SFDR became applicable in March 2021, most real estate funds were classified asArticle 6, known as “brown” products, but since then, many players havecreatednewrealestateproductswith ESGobjectives and characteristics. Currently,thehottopicistheclassification of real estate funds. Recently, the Euro- pean Securities and Markets Authority (ESMA)andEuropeanAssociationforIn- vestors in Non-Real Estate Vehicles (INREV) clarified that Article 9 products shouldholdonlysustainableinvestments. This means that the funds meant to im- prove the environmental impact of non- sustainable buildings should be classified asArticle 8 products. Another challenge is SFDR and Taxon- omy disclosure requirements, applicable since January 2022, which cover disclo- sures in pre-contractual documents and annualreportsincludingnon-financialin- dicatorsreportingtostakeholders.In2023, completion of these requirements will be evenmoreimportant,fromtheSFDRlevel IIrequirementstotheapplicationofallthe six taxonomyobjectives,whilenot forget- tingtheprincipaladversesustainabilityin- dicators report. Inaddition, thereare stillmanyquestions withno clear answers: howtodetermine a sustainable investment, which consid- erationsapplytothe“donotsignificantly harm”principle,howtocalculatethetax- onomy alignment. The industry has the potential tomake a sizable environmen- tal impact by reducing greenhouse gas emissions alongall thevalue-chain, but it needs clear rules and guidelines. Above all, the main issue facing the real estate industry, given the above consid- erations, is data. Data is integral to identifying the mate- rial components necessary to implement policies, procedures, and controls to re- port meaningful information to in- vestors. Reporting processes for non-financial information still fre- quently need resources, management attention, anda robust structure inorder to: identify data points; ensure strong and reliable systems, effective controls and efficient information collection; and ultimatelyproduce effective reports. The need for external assurance is growing, in order to provide stakeholders with a third-party statement on reported non- financial data. Regulatory requirements represent an important push. However, it is of the ut- most importance tounderstand that ESG data is fundamental to delivering the re- turn that investors expect. Asset managerswant their assets to per- formin the best possibleway, and, as as- sets are not isolated from the economic ecosystemwhere they are located, a bet- ter, longer, stronger portfolio isnecessary and more simple to develop, acquire, andmanage in amore sustainable envi- ronment. Therefore, the focus is onmore sustainable assets in themost sustainable regions. Real estate investment man- agers (REIMs) need to identify these as- sets, and developers need to showcase their ESG-performing products if they want to capture the opportunities. Certain labels, certifications, andrankings in the market can provide comfort when looking at corporate assets andportfolios. ESGratingsandrankingsarearguablythe best options to linkassets toESGportfolio performance as they take into considera- tion KPIs and data already produced for building efficiency certifications (such as BREEAM,LEED,andWELL)pluscorpo- ratedatausuallydrivenbycompanies’so- cial impact andgovernance. PertheUN’swebsite,63investmentcom- panies signed the Principles for Respon- sible Investment (UNPRI) to incorporate ESGissuesintotheirinvestmentdecisions in 2006. ByApril 2018, the number of sig- natories had grown to 1,715 and repre- sented$81.7trillioninAUM.Basedonthe last figure published in 2021, more than half of global asset owners are currently implementing or evaluatingESGconsid- erations in their investment strategy. According to the Global Initiative for Sus- tainabilityRatings ,atthebeginningof2021, there were more than 600 ESG data providers, external ratings, rankings, in- dexes,research,andawards,dividedinto non-specialized international agencies, specialized agencies, and local agencies. Names like Sustainalytics , a rating com- pany that launched its own new ESG methodologyin2019,complementlonger establishednameslike MSCIESGRatings in the European landscape. Other well- known names include Refinitiv (launched in 2018 by the London Stock Exchange), Bloomberg ESG Disclosures Scores , FTSE Russell’s ESG Ratings , ISS ESG , and CDPESGRating. Togiveanexampleofthevolumeofrated companies, Bloomberg collects ESGdata formore than 10,000 publicly listed com- panies globally. MSCI arms all investors with ESG ratings of 2,800 topfirms. The increasing importance of the ESG weight in the calculation of an entity’s creditworthiness is assessedbycredit rat- ing agencies (CRA) and regulated by an EUlegislativepackagecomprisingRegu- lation No 462/2013 and a Directive 2013/14/EU.TosecuretheroleofCRAsas catalysts of ESG factors in the achieve- ment of theEUGreenDeal objectives, the EU Commission is providing a public consultation on ESG ratings and sustain- abilityfactorsincreditratingsuntil6June. BothCRAs andESGratings are opinions providedbyspecializedentitiesandused by financial institutions and professional investors who then pass the information to consumer investors, business contacts and other decision-making stakeholders. As these ratings already impact the tran- sition to a sustainable economy, the EU Commissionisenvisioningapolicyinitia- tiveaimedatregulatinghowCRAsincor- porate ESG factors into creditworthiness assessments. Three big credit rating agencies lead the market integrationof ESGratinganalysis into credit research:Moody’s Vigeo Eiris, S&PGlobal’s SAMESG, and Fitch’s ESG rate. In thismarket, we see a clear consol- idation trend that will probably lead to only three main ESG index providers: FTSE Russell, S&P Dow Jones Indexes, andMSCI – plus two proxy providers in Moody’s and S&PGlobal. ESGratingagenciesuseinformationfrom various sources: the companies them- selves (via public documents, specific questionnaires, telephone, and face-to- face contact), stakeholders (like NGOs, trade unions, governmental organiza- tions, etc.), and themedia. The amount of gathered data varies between agencies: MSCI constructs ratings using 1,000 data points; Quality Score analyzes over 200 factors;DJSIWorldcovers100ESGissues. The final rate is publicly available, and, dependingontheagency,averyshortre- port might also be available. ESG rating agencies provide their clients with rating databases as calculated by weighting the ESG criteria defined by each agency. Deeper analyses provided by the agency giveaclearerunderstandingofeachscore, identifying key gaps and potential im- provement. Users should also consider that the infor- mation on which the ESG ratings are basedmaybe obtained fromsources that are not sufficientlydiversified– as data is gatheredbyartificialintelligencefromin- formation publicly available on the inter- net, press, and specialized publications. Timingmayalsobeanissue,sincethefre- quency of updates varies from yearly to quarterlyreports,andimprovementover time is not always available across KPIs due to changes in scorecard methodol- ogy. Moreover, scores are unevenly ad- justed across sectors, so a KPI weighting more for industry X couldweight differ- ently for industry Y, even if the perfor- mance level is analogous, making the comparison of ratings difficult for muti- sector investors. Another consideration is the diverse methodologiesusedforESGratings,asno common framework exists, and each agencyhasdeveloped itsownmethodol- ogy. The criteria and weighting system between criteria may differ according to business sector and benchmarking is done against the agency’s own rating cri- teria. Although this benchmarking in- cludes international standards, ESG ratings may not fully disclose the KPIs andmethodologies adopted. Some argue that all ratings will have shortcomings, but they still effectively catalyze changes to management’s be- havior. Proving ESG performance to in- vestors and clients through well- recognizedratingsisamustformanyde- velopers and asset managers to attract capital. In our experience, ESG ratings improvement effectively increases credit worthinessandhelpsattractESG-hungry investors, increases scores inESG-related indexes, and definitely entices newer, stronger stakeholders among clients, suppliers, and employees. Therefore, Asset managers’ ESG efforts must be properly reported to the market since a better ESG rating could improve the perception of the investors, boosting performance, and providing a healthier balance sheet. This leads us back to the transparency re- quired by the EU regulations; properly capturing,controlling,andreportingESG information that is significant to stake- holdersisanincreasinglydistinctivefactor for success – not a “tick-the-box” compli- ance exercise. The real estate industry clearly has a very importantroletoplayintheESGtransfor- mationof our economy by leveraging the clearalignmentoftheindustry’slong-term goalswithESGobjectives.Assetmanagers and developers can differentiate their of- fers to take advantage of available oppor- tunities, but…the clock is ticking. ESG is shaping the future of Real Estate