INREV, the European Association for Investors in Non-Listed Real Estate, has submitted a response to the European Commission’s latest consultation on the Sustainable Finance Disclosure Regulation. Among the salient changes proposed by the industry body are that Article 8 and Article 9 are eliminated in favor of a new labeling regime to better accommodate real estate transition investment.
Having consulted with around 50 real estate professionals to discuss views on these issues, INREV’s response, seen by PERE, argues that although Article 8 and Article 9 are useful for regulating transparency and combatting greenwashing, they do not work effectively as formal product categories.
This reflects how Article 8 and Article 9 are being used by the financial industry as “de facto product labels,” as described by the EC in the consultation, which was not the original intention.
Jeff Rupp, INREV director of public affairs, told PERE the association’s aim was to develop an aligned industry response. The consensus view was that Article 8 and Article 9 should not be used as labels and a labeling regime that clearly describes a fund’s sustainability strategy should be adopted instead.
INREV thus argued in its response that existing frameworks should focus solely on disclosing a fund’s sustainability strategy, rather than describing it using a de facto label. However, if a formal labeling system were developed alongside SFDR, this would likely risk confusing investors. “We would therefore advocate eliminating Article 8 and Article 9 after a transition period,” the response stated.
INREV also wrote that it “notes and supports” the investment product labels proposed by the UK Financial Conduct Authority in a policy statement issued in late November, which maps plans for the incoming Sustainability Disclosure Requirements.
Provided the product meets the necessary criteria for targeted sustainability outcomes, a fund can be labeled either ‘Sustainability Focus,’ ‘Sustainability Improvers,’ ‘Sustainability Impact’ or ‘Sustainability Mixed Focus.’ Managers will be able to use the labels from July 31, 2024.
Rupp said the real estate industry would support an ‘improver’ label such as the FCA proposes in order to accommodate transition funds focused on the sustainable retrofit of standing stock. He added the mixed focus label would also be “really useful” for real estate funds. “The two categories of social impact and environmental improvement are not mutually exclusive.”
To promote compatibility with other regulatory regimes, the FCA wrote that it was “ready to work with the EU authorities on this important issue.” In its consultation response, INREV has urged the EC to reciprocate this offer.
Not fit for purpose
Despite the time and resources real estate managers have thus far dedicated to understanding SFDR and implementing fund disclosures, Rupp argues there is much to be gained from moving to a simpler system.
“SFDR remains a very difficult regulation, difficult to understand and difficult to implement,” he says. “We should replace it with something more straightforward, where you put the strategy of the fund on the tin.”
He adds the drafting group considered whether to recommend keeping both systems in parallel indefinitely, but decided a phase-out of Article 8 and Article 9 would work better. “You can still have the disclosure and the transparency, you can still discourage greenwashing, but with a label, objectives are clear.”
In order to protect the capital already committed, INREV proposes that any transition to a new regime, although “critically important,” should consider grandfathering certain types of funds, such as closed-end funds that are no longer raising capital or open to new investors.
This is not the first time INREV has sought changes to SFDR regulation. The industry body issued a report in January this year outlining how SFDR is problematic for real estate funds, and particularly prohibitive to efforts to transition existing properties to be more environmentally efficient. The report criticized SFDR on the basis of it not accommodating the flow of capital into Article 9 ‘transition’ funds due to the perceived requirement that assets must be sustainable at all times.
In April, the European Supervisory Authorities issued a consultation paper clarifying that tracking a benchmark aligned to the Paris Agreement is already sufficient to disclose under Article 9. As reported by PERE last month, however, there remains much confusion among real estate firms as to the disclosure requirements of an Article 9 fund. The recent launch of transition-focused Article 9 funds from managers Fidelity International and Ardian has gone some way to elucidate the situation, but such funds remain rare in an industry still grappling with myriad legislative idiosyncrasies around sustainability reporting.
The latest SFDR consultation opened on September 14 and will close on December 15. The EC’s response is due to be published in Q2 2024.
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