Today we’re discussing the impact of the Sustainable Finance Disclosure Regulation (SFDR) on European real estate investment, exploring increasing difficulties in marketing non-ESG funds and the growing preference for ESG funds.
The importance of granular data in meeting regulatory requirements and accessing green funds remains clear.
For over two years, the acronym on everyone’s mind in European property has been SFDR. Whether it be Article 6, 8 or 9, asset managers and investors have been navigating the new EU Taxonomy Regulations and for some, reaping the rewards of access to these new green funds.
But amid persistent macroeconomic pressures, including high interest rates and a slowdown in some of the largest economies, the fourth quarter of 2023 saw significant changes in the fund industry, which got us thinking. Now we’ve passed the two-year mark with SFDR, we felt it was time for a review on what we’ve seen, and into 2024, what new changes lie ahead.
Because after all, nothing stands still in real estate, not even those all-important assets!
Tradability – The Influence of SFDR.
The introduction of SFDR funds has had a significant impact on European real estate investment, but no more so than for Article 6 funds. Categorised as a fund without a sustainability scope, there has been a clear trend associated with these ‘brown funds’, and that is one of having difficulty selling. In the words of Goldman Sachs:
“This trend of recategorizing funds is corroborated by our industry conversations, where clients have difficulty selling Article 6 funds, with some stating end-clients have asked for redemptions on Article 6 funds.”
This, alongside the growing trend of assets qualified until Article 8 taking a higher valuation, echoes the strength of this regulatory change when it comes to tradability. So too does the growing number of fund upgrades, driving funds to Article 8 at a minimum. A total of 435 funds were upgraded from Article 6 to 8 across equity and fixed income in 2023, representing $131bn in AUM… and as we always say, the numbers don’t lie!
So, what has the ESG effect looked like under the tint of SFDR regulations?
SFDR: Still driving flows and trends to ESG in Europe.
In the Goldman Sachs Q3, 2023 SFDR report, they detailed that SFDR continues to drive flows and the transition of non-ESG funds towards ESG (disclosing under Article 8 and 9) funds as managers find it increasingly difficult to market Article 6 (non-ESG) funds in Europe. Additionally, we see a meaningful boost in both committed and actual SI% across Article 8 and 9 funds, most notably with Article 8+ funds.
“SFDR continues to lead to further penetration of ESG across all asset managers, with more managers pushing for 100% of funds to disclose under Article 8 and 9.
Taking a sample of nearly 30 asset managers, we find a wide range in how much of the total fund assets in scope of SFDR asset managers are classifying as article 8 and 9, from a low of 4% to a high of 100%. Across ~30 select large asset managers, penetration of Article 8 and 9 funds has risen from 47% to 78% since SFDR kicked in (Exhibit 1). Looking within ESG funds of the selected pool, Article 8 makes up the vast majority of ESG funds (avg. 88% of AUM) while Article 9 funds remain rare (12%).”
But, what are Article 8+ funds and how do they fit in the wider SFDR landscape?
Ultimately, SFDR and investments across Europe are competitive. So as Article 6 funds have been upgraded and Article 8 funds have reached critical mass, there became a need for an Article 8+ fund to drive differentiation in the market. So, the difference –
- Article 8 funds with ‘sustainable investments’ (Article 8+)
- Article 8 funds with NO ‘sustainable investments’ (Article 8 no SI)
According to Goldman Sachs, Article 8+ funds saw 3.2x of cumulative flow vs. Article 8 (No SI) funds since Jan ‘19, reaching ~U$378bn of cumulative flow by Jul ‘23, despite the total number of Article 8 (No SI) funds being 24% higher than Article 8+ funds.
In comparison, SFDR Article 9 funds have shown significantly stronger flows per fund versus Article 8 and 6 funds. Since 2022, Article 9 is the only category receiving consistent inflows across both Equity and Fixed Income categories. During 2022 alone, cumulative flows for Article 9 funds reached U$18bn across Equity and Fixed Income, in contrast to Article 6 and Article 8 funds which have both seen net outflows over the period (-$32bn and -$58bn, respectively).
The MVP amongst it all? Data.
While we know the key objective here is to trade, refinance and purchase assets, all with the goal of making money, SFDR across Europe has also emphasised another MVP amongst real estate – Data.
Whether it be evidencing regulatory requirements under ESG governance or reporting on ESG performance to gain access to ‘light green’ or ‘dark green’ funds or gaining sustainable certifications to further enhance asset valuations – one core element threads throughout all these objectives under SFDR, and its granular data. Without data collection and near real-time analytics proving sustainability and social enhancements, the real benefits of SFDR can’t be uncovered. And with so many funds showing positive progress, and competition for profits only increasing, it feels like it’s now or never for investors and asset managers.
How Utopi can help.
The Utopi platform gives you access to ESG data, showcasing environmental and social alignment, essential when applying for ‘Light Green Funds’ under SFDR Article 8. Our Utopi IoT sensors, and the data they collect, can curate real-world insights to showcase ESG alignment and positive sustainable prioritisation. Giving Fund and Asset Managers access to the essential data they need to gain access to these SFDR funds and loans.
SFDR Article 8 sustainability indicators include the following, all of which can be tracked with granular data in the Utopi platform:
- Carbon footprint
- Energy consumption
- Emissions to water
- Water ratios
- Fossil Fuel Exposure through Assets
What’s ahead?
There are a number of regulatory updates to SFDR due for 2024, but the key updates to be prepared for are:
- ESMA Response to Consultation on usage of PAIs and updated amendments to the RTS (fund-level reporting templates) – this includes updates to PAI metrics, and fund-level reporting templates. Expected in Q4.
- EU Commission consultation on amending level 1 SFDR text with aim to simplify definitions and address the main struggles of implementation. Expected to start in Q4.
It’s safe to say that in the last two years SFDR has not only shifted the norm for real estate investments in Europe, but it’s also shifted the landscape for future markets in the context of ESG. Is it driving Europe closer to a sustainable, net-zero world? Yes, but it’s also driving Europe to make decisions fast. As SFDR Article 8 funds reach critical mass, in 2024 it will become even more important to watch out for new regulations and new market trends. Because ultimately, it’s all about money, and it’s a competitive game out there.
For more information on Utopi, and how our PropTech and data solutions can help you gain greater access to green funding, see our website.