JOURNAL Edition 119 | April - June 2019 | www.aima.org

Man Group talk about Clifford Chance on What does artificial climate change sustainable finance intelligence mean?

08 16 20 2 AIMA JOURNAL | EDITION 119 3

MESSAGE FROM AIMA’S 24 CEO

elcome to the 119th edition of the WAIMA Journal – a collection of insightful On the operational side, SS&C provide an excellent commentary from our members on several overview on the process of setting up an alternative fund in Europe. The article is a guide for US-based key developments currently impacting the managers that want domicile their product in Europe alternative investment industry. I would like in order to attract capital from European investors. to thank all the contributors for their time However, this is a market which is more stringently 08 and effort. regulated than North America. Oligo Swiss Fund Services looks at the process of Inside you will find analysis on a wide range of topics. 36 These include ESG due diligence, the path of US distribution to investors in Switzerland, touching on monetary policy, what impact Brexit may have on the the upcoming regulatory changes such as the Swiss European asset management industry and the value Federal Financial Services Act (FinSA) and the Swiss that artificial intelligence can create for private clients. Federal Financial Institutions Act (FinIA) – both of which will impact the distribution process. The journal starts with an interesting piece of macroeconomic analysis from CME Group’s Chief Looking at the world from a geopolitical angle, asset Economist, who seeks to answer an important managers must still consider Brexit. Maples Group question on the minds of most asset managers: “Will offer their take on the impact the UK’s departure the Fed cut rates in 2019?” from the European Union may have on the asset management industry in Europe. The good news is How sustainable finance and ESG are being that asset managers continue to prepare themselves for any event by developing robust contingency plans. implemented by fund managers are also covered. 30 32 In an engaging article, Man Group discusses how discretionary portfolio managers can structure their Finally, Leith Wheeler provides timely analysis on strategies to account for climate change risks. the impact that artificial intelligence technologies continue to have on the relationship between client In the same vein, INDOS Financial Limited explores and asset manager. Looking into the future, artificial Will the FED cut rates in 2010? 04 Setting up an alternative fund 24 the key growth drivers supporting ESG investing, as intelligence is here to stay – but not without causing CME Group in Europe some industry disruption. well as some of the pitfalls that investors should avoid. SS&C I hope you find this edition of the AIMA Journal Introducing climate change 08 Clifford Chance writes about consistency and in discretionary portfolios The SEC’s form PF data usage: 28 harmonisation in global regulation governing the fast- interesting and I wish you all the best for the next growing sector of sustainable finance. Both IOSCO quarter. Man Group Better data policies and ESMA are continuing to work on a regulatory Viteos Fund Services framework to support the increasing demand for Jack Inglis Brexit and its impact on the 12 investment products structured around sustainable Chief Executive Officer, AIMA European asset management industry ESG due diligence - “trust but verify” 30 finance goals.Castle Hall Diligence provides some Maples Group Castle Hall Diligence insightful commentary on the due diligence needed on ESG investing, capturing the essence of the process Sustainable finance: The drive for 16 Distribution to investors in 32 as “trust but verify”. consistency and harmonisation in Switzerland Oligo Swiss Fund Services Remaining within the realm of regulatory global regulation developments, Viteos Fund Services explores Clifford Chance how the US market regulator – the Securities and ESG - positive change and possible 36 Exchange Commission – is making use of the data Friend or Foe: What does artificial 20 pitfalls gathered through the infamous Form PF. The filing intelligence mean for the private INDOS Financial Limited requires private funds, like hedge funds, to report client? on performance, liquidity and investment exposure, Leith Wheeler Investment Counsel Ltd. amongst other items. 4 AIMA JOURNAL | EDITION 119 5

WILL THE FED CUT RATES IN 2019?

Blu Putnam All examples in this Fed might cut rates in 2019, we Chief Economist report are hypothetical work through the Federal Open CME Group interpretations of Market Committee (FOMC) policy [email protected] meetings in 2019 and provide our situations and are used for analysis of why the Fed might cut explanation purposes only. rates or stand pat based on an The views in this report analysis of only the historical data reflect solely those of the they will be examining as they author and not necessarily meet. Our conclusion is that if lower rates are coming, the Fed those of CME Group or its may cut rates sooner rather than affiliated institutions. This later. report and the information herein should not be June 19, and July 31, 2019 FOMC considered investment Meetings advice or the results of The June FOMC meeting occurs actual market experience. against a backdrop of trade war worries and slowing job creation. be weak enough to stir a sudden falling. So, if the Fed does cut, can agree on new funding for CME Group’s Fed Watch tool The problem is new jobs are desire in the FOMC to cut rates. it will have to break precedent, Fiscal Year 2020. shows a strong probability of two not being created as fast as in base its case on forecasts, and yet rate cuts by the Federal Reserve 2018, but layoffs are minimal as If the Fed decides to cut rates in appreciate that the rate cuts may The Fed will have absolutely no (Fed) in 2019. Many analysts reflected unemployment holding the summer of 2019, the Fed will not help. desire to step into the debt ceiling agree with the indications at 3.6%. When the FOMC meets have to break with precedent and and funding political debate. If from the federal funds futures on July 30-31, it will have received do so based on the forecast that September 18, 2019 FOMC the Fed had decided to cut rates market, but they have concerns. a few days earlier (July 26) the in the second half of 2019 the Meeting in the summer, the Fed is unlikely Will the trade war weaken the Bureau of Economic Analysis trade war will result in weak job to cut again. If the Fed remained U.S. economy? Is the flat yield (BEA) advance report on Q2/2019 growth, rising unemployment and More than likely in September, on hold in the summer, the curve signaling a recession is GDP. It will also have seen data sluggish real GDP growth. This President Trump and Congress data-dependent Fed may just coming in 2020? Will there be on the employment situation for will be a very tough decision for may be fighting over the stay on hold and see whether a debt ceiling or government June (released on July 5) by the the Fed to get into the forecasting debt ceiling and funding the there is a compromise or whether shutdown crisis in the fall of Bureau of Labor Statistics. And, business because of a trade Government. The debt ceiling the federal government shuts 2019? These are real risks, and it will have in its possession a war about which they may have stands at $22,028,945,980,301.65 down again, as it did for 35 days the futures market reflects these variety of metrics on inflation and decidedly mixed feelings. or just over $22 trillion. The U.S. in December 2018 through late concerns. Nevertheless, it is hourly wages for the month of Treasury has been managing its January 2019, and also whether worth noting that futures markets June. Job creation is a question There is a second consideration cash carefully to stay under the a debt ceiling crisis causes any provide a view into the current mark. The unemployment rate for the Fed. Will the rate cuts ceiling. With annual trillion-dollar missed coupons or redemptions consensus expectations of market is likely to still have a reading at make any difference to the budget deficits occurring as a that could put US Treasury participants, but expectations or below 4%. Q2 Real GDP may economy? If the main reason direct result of the December securities into a technical default. have a way of changing over time turn out to be a little lower than that jobs are not being created 2017 corporate tax cuts, time will as new information becomes the 3.3% posted for Q1/2019. is corporate worries about run out on the U.S. Treasury’s October 30, 2019 FOMC Meeting available. Inflation, or the lack of it, will the weaponization of tariffs ability to stay under the debt probably be a part of the FOMC and retaliation from impacted ceiling around September There are two scenarios of what Here we take a different approach debates, as in previous meetings. countries, then it may not matter 2019, give or take a few weeks the Fed will be debating at its based on the observation that We do not see the core inflation if the federal funds rate is 2.4%, either way. And there is also meeting just before Halloween, the Fed is data dependent, rate or sluggish wage growth 1%, or even zero. Businesses a government funding crisis and possibly the day before the with the implication that the being sufficiently weak as to worried about the trade war are brewing. Authorized U.S. Federal UK crashes out of the European Fed does not try to anticipate prompt a rate cut, at least not not going to expand jobs while Government funding will end on Union with a nasty, hard Brexit. economic data. Thus, instead yet. All in all, there are no signs their supply chains are being September 30, 2019, unless the Of course, the Fed does not care of providing reasons why the suggesting the data is likely to disrupted and global demand is U.S. Congress and the President about Brexit for making U.S. 6 AIMA JOURNAL | EDITION 119 7

For investment professionals only. Not for public distribution. interest rate policy, it is just an Bottom Line interesting aside occurring at the same time as the FOMC meets. • The Fed prefers to be data dependent. So back to the two scenarios. One, the federal government • It will be a tough call for is shut down and there is a a data-dependent Fed to full-blown debt ceiling crisis, anticipate economic weakness which means the Fed will do from the trade war and take absolutely nothing until after pre-emptive action that it Data, Data, Everywhere the crisis has been resolved, knows may be ineffective. the government re-opened, and a full quarter of GDP data • If a data-dependent Fed does available to assess the economic break precedent and cut rates damage. Or two, a compromise over trade war fears and was reached between the forecasts of coming economic Democratic-controlled House of weakness, the Fed is more Representatives, the Republican- likely to act in the summer controlled U.S. Senate, and of 2019 rather than later in President Trump. With the debt the year when debt ceiling ceiling raised and the government and government shutdown funded for fiscal year 2020, the debates kicks into gear. Fed will sigh with relief, express optimism about the economy, • Consequently, if the Fed cuts expect inflation to creep higher rates, it may be sooner rather in 2020, and so the Fed will do than later. But, there will be nothing. some FOMC members who will be uncomfortable with a December 11, 2019 FOMC pre-emptive rate cut based Meeting on uncertain forecasts of the trade war’s impact on job In December, the Fed will be creation. waiting on Q4 real GDP and inflation data before making any decision on cutting rates. Remember, this is now the longest U.S. economic expansion on record, and economic expansions do not die from old age, they typically end due to policy mistakes. Doing nothing and letting the economy continue How we’re turning off-the-shelf ESG data to grow, albeit modestly, with subdued inflation below the Fed’s 2% target is the likely course of into useful and informative signals. action. The available data are unlikely to convince the few www.numeric.com/esg-data remaining “hawks” on the FOMC who are still worried about future inflation to switch to a “dovish” vote. Most FOMC members will occupy the undecided middle This material is for information purposes only and does not constitute an offer or invitation to invest in any product for which any Man Group plc affiliate provides investment ground, because the economic advisory or any other services. This material was prepared by Numeric Investors LLC (“Numeric”). Numeric is registered as an investment advisor with the SEC. Numeric is also registered as a commodity pool operator with the National Futures Association (“NFA”) as authorized by the US Commodity Futures Trading Commission (‘CFTC’). data is conveniently mixed and Unless stated otherwise this information is communicated in the European Economic Area (ex Germany, Austria and Lichtenstein) by Man Solutions Limited which is authorised and regulated in the UK by the Financial Conduct Authority. In Switzerland, this information is communicated by Man Investments AG which is regulated by the unlikely to make a convincing Swiss Financial Market Authority FINMA. In Australia, this is communicated by Man Investments Australia Limited ABN 47 002 747 480 AFSL 240581, which is regulated by the case. Australian Securities & Investments Commission (ASIC). In Germany, Austria and Lichtenstein, this is communicated by Man (Europe) AG, which is regulated by the Financial Market Authority Liechtenstein (FMA). In Hong Kong this is communicated by Man Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. In the United States this material is presented by Man Investments Inc. (‘Man Investments’). Man Investments is registered as a broker-dealer with the US Securities and Exchange Commission (‘SEC’) and is a member of the Financial Industry Regulatory Authority (‘FINRA’). Man Investments is also a member of Securities Investor Protection Corporation (‘SIPC’). Man Investments is a wholly owned subsidiary of Man Group plc. (‘Man Group’). The registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed Man Investments. In the US, Man Investments can be contacted at 452 Fifth Avenue, 27th floor, New York, NY 10018, Telephone: (212) 649-6600. 19/0753/RoW/GL/I/W 8 AIMA JOURNAL | EDITION 119 9

INTRODUCING CLIMATE CHANGE IN DISCRETIONARY PORTFOLIOS

Michael Canfield Introduction Challenge 1: Enagagement By contrast, some highly contribute to similar initiatives investors highlight environmental Portfolio Manager versus Divestment polluting sectors are arguably and improve the impact of the issues, whilst the data released Man Group Climate change, and how to indispensable to a green sector as a whole. To set up can be used to form a more [email protected] address it, within investment Perhaps the most important economy. Improved battery the portfolio in this manner, accurate assessment of company strategies are becoming ever conundrum in climate change technology is essential if we are managers would operate a performance. Steven Desmyter more important for investors, investing is the ‘engagement to replace the world’s reliance positive rather than a negative Co-Head of Responsible money managers and financial versus divestment debate’. on fossil fuels. However, these screen, actively seeking out A key point to note is how Investment regulators alike. Indeed, climate (Indeed, this debate is something batteries use lithium, alongside companies with stronger ratings important institutional investors Man Group change was considered to be that comes up over and over large quantities of nickel and and assisting them to improve can be in effectively advocating [email protected] the most important specific again. Listen to what Harvard graphite. Nickel mining has further. change. In ‘Political, Social and environmental, social and Management Company’s Michael had a bad reputation in recent Environmental Shareholder governance (ESG) issue by money Cappucci and Fiona Reynolds, years; the Philippines closed With engagement, responsible Resolutions: Do they create or managers, according to the US the CEO of the UN Principles 17 nickel mines in 2017 due investors can actively vote destroy shareholder value?’, SIF Foundation.1 For institutional of Responsible Investment, to environmental concerns, at companies’ annual (or Joseph Kalt and Adel Turki detail investors, climate change was the have to say on this matter in especially deforestation.3 This extraordinary) general meetings, the increase in the number third-most important issue. our ‘Perspective Towards a leaves the climate change investor for example, to improve ESG of activist resolutions filed on Sustainable Future’ podcast in something of a quandary – policies and behaviours. Indeed, environmental issues, from 51 While most of the attention so far series). by supporting a key part of the shareholders can mandate in 2006 to 100 by July in 2018.7 has been on whether controls on supply chain for electric vehicles, corporate disclosures on a However, only four climate carbon emissions will strand the Traditionally, social responsible one might actively contribute to number of issues, such as change-related proposals assets of fossil-fuel companies,2 investing (‘SRI’) has incorporated deforestation. improving the quality and passed in shareholder meetings we believe it is important to the use of negative screening timeliness of emissions data, between 2006 and 2017.8 Of widen that net and look at climate to avoid investing in sectors In our view, the way forward is to assessing the environmental these, the paper analyses the change across an investment which are controversial. Using be actively engaged with sector- risks in the company’s business three successful proposals portfolio. this framework, climate change leading companies to encourage model and mandating disclosure which occurred in 2017, which investors would divest themselves better practices from the sector of other sustainability metrics required Occidental Petroleum, Climate change investing follows of anything related to polluting as a whole. By using ratings to such as water usage and energy Exxon Mobil and PPL to publish two main principles. First, climate industries, selling oil companies, provide a screen, investors could efficiency. One such example assessments of the impact of change investors seek to invest mining firms, auto manufacturers then create portfolios weighted is oil major Royal Dutch Shell, climate change on their business in those companies which and other emissions-producing toward companies who are ESG which – in December 2018 and in the event of global warming in make a positive contribution firms. leaders within their sectors. This after discussions with institutional the range of two degrees Celsius. to combatting climate change. could help avoid restricting the investors acting on behalf of Tellingly, all three successful Second, climate change investors Whilst this approach helps avoid investment universe, and allow Climate Action 100+ – agreed to proposals were supported by seek to strengthen their portfolios the perceived moral contagion for engagement. Nickel mining link executive pay to short- and institutional investors. against the future environmental, of owning controversial stocks, in the Philippines is again a good long-term targets for reducing political and social effects of it doesn’t necessarily help to example; in September 2018, carbon emissions.5 Additionally, Indeed, in their paper, Kalt and climate change. promote better behaviour within the government introduced a shareholder vote in May 2018 Turki say that without the votes of these sectors. Deciding to exclude rules to ensure companies re- required natural gas company these three asset managers, the In this article, we explore the any particular industry requires forested land they had worked.4 If Range Resources to issue a report proposals would not have passed. three main challenges investors qualitative judgement and also prepared to engage with mining on its policies related to methane Retail investors only voted 10% encounter when aiming to reflects the interaction of wider companies, environmentally emissions and management.6 of their shares in favour of all introduce climate change into ESG factors with climate-change conscious investors could By enhancing disclosures, environmental proposals in their discretionary portfolios – investing. Managers might engagement versus divestment; consider some sectors to be 3 https://www.reuters.com/article/us-philippines-mining/philippines-to-shut-half-of-mines-mostly-nickel-in-environmental-clamp- the lack of data; and tracking entirely irredeemable. down-idUSKBN15H0BQ error – and how to address them. 4 https://www.reuters.com/article/us-philippines-mining/philippines-implements-fresh-nickel-mining-curbs-in-environment-protec - tion-drive-idUSKCN1LM0KY 5 https://www.shell.com/media/news-and-media-releases/2018/leading-investors-back-shells-climate-targets.html 6 https://www.pionline.com/article/20180517/ONLINE/180519842/shareholders-ok-proposal-calling-on-range-resources-to-issue-emis - 1 US SIF Foundation’s biennial Report on US Sustainable, Responsible and Impact Investing Trends, published October 2018: https://www. sions-management-report bloomberg.com/news/articles/2019-03-01/msci-s-latest-china-call-positive-but-mostly-symbolic-analysts 7 https://mainstreetinvestors.org/wp-content/uploads/2018/06/ESG-Paper-FINAL.pdf 2 Dietz, Bowen, Dixon & Gradwell, Climate value at risk of global financial assets, Nature Climate Change, April 2016 8 Page 25, https://mainstreetinvestors.org/wp-content/uploads/2018/06/ESG-Paper-FINAL.pdf 10 AIMA JOURNAL | EDITION 119 11

2017, compared with 32% of ratings such as diversity, labour affect their business. Secondly, it tracking error, and vice versa. and incorporated into share asset managers. We believe asset concerns and governance takes time to develop consistent This leads us to the question: prices. managers using their concerted analysis.9 standards. For context, the do green portfolios actually voting power will continue to International Financial Reporting underperform conventional Conclusion provide the best chance of Both firms use proprietary Standards (‘IFRS’) were first benchmarks? To answer that, we changing corporate behaviour on models to create a sector published in 2001, more than compared the performance of the Christiana Figueres – best known environmental issues. benchmark for climate change 30 years after the concept MSCI Low Carbon Target Index for her successful coordination performance, against which to of international accounting with the MSCI ACWI Index (Figure of the Paris Climate Agreement Man GLG currently assesses compare corporate disclosures.10 standards was first mooted. 3). Since 3 December, 2010, the in 2015 – once said that “climate how a proposal may enhance However, models to produce final Granted, climate change is a MSCI Low Carbon Target Index change increasingly poses one of or protect shareholder value in ratings rely on disclosures from pressing issue, so it is possible has outperformed the MSCI ACWI the biggest long-term threats to either the short, or long, term companies about their supply that TCFD standards will become Index by 48 percentage points. investments.” when deciding how to vote. chain and production methods widely adopted more quickly than December 2010. Considerations of climate change as large inputs. As such, investors IFRS. At Man GLG, we believe that and ESG remain a factor within should beware of greenwashing. However, even if a low-carbon climate change is a threat, but this framework. Over time, we The 2015 auto emissions scandal Challenge 3: Tracking error and portfolio underperformed or also an opportunity. Introducing hope to continue to use these provides a perfect example of carbon pricing generated similar returns to a climate change in portfolios is shares to better promote good how companies can disclose conventional index, that could not without its challenges, but governance and sustainability, incorrect environmental data. Investing in climate-friendly mean investors essentially get we believe solutions exist; and and to support initiatives that It therefore remains vital that companies also presents the a free option on carbon. We by introducing climate change improve the environmental investors are able to conduct their problem of tracking error – the believe that by investing in in portfolios, money managers performance of companies in our own environmental due diligence potential for green portfolios low-emission companies when and investors can work with a portfolio. alongside that of environmental underperforming relative to their their environmental status may forward-looking vision together to data providers. Indeed, these benchmark indices. be undervalued by the market, try and achieve more sustainable Challenge 2: Data (or the lack vagaries can create potential investors could benefit if the full growth. thereof...) opportunities for generating A smaller investment universe is cost of being a highly polluting alpha for those willing to do often thought to lead to a higher company is eventually realised While there has been a leap in the detailed research. Man Numeric, quality and quantity of ESG data in for example, has created a Figure 1: Top Specific ESG Criteria for Money Figure 2: Top Specific ESG Criteria for Insitutional recent years, disclosing, reporting proprietary model to assess Managers, 2018 Investors, 2018 and aggregating ESG data still companies on their sustainability. remains a significant challenge, not just to climate change As well as scoring companies on investors, but to responsible their impact on the environment investors generally. Complaints to promote change, responsible about ESG data often centre investors have to understand around: the potential impact of climate change on companies’ business • Absent or incomplete data; models. In this area, the FSB Task Force on Climate-related Data that is available, but Source: US SIF Foundation’s 2018 Report on US Sustainable, Responsible and Impact Investing Trends. • Financial Disclosures (‘TCFD’) is incomparable across firms, making strides by encouraging industries and sectors; Figure 3: MSCI Low Carbon Index Outperforms Figure 4: Volatile Carbon Prices companies to voluntarily disclose the MSCI ACWI • Too much unnecessary and/or climate-related information. irrelevant information; It also advises companies to disclose the governance, strategy, • High cost of obtaining the risk management tools and the data. metrics and targets they are using to try and manage the impact of At Man GLG, we currently use two climate change. main data providers: Trucost and Sustainalytics. Trucost, a part of Again, this presents some S&P Global, provides company challenges: Given that even ratings based on carbon emission leading climate scientists are data, alongside information on unable to predict the pace of water use, pollution impacts and climate change with accuracy, waste disposal. Sustainalytics it is difficult for non-experts to also provides carbon portfolio assess how climate change will analytics, alongside wider ESG Source: Bloomberg; as of 23 May 2019 9 https://www.sustainalytics.com/esg-ratings/ Source: Bloomberg; as of 22 May 2019. *Normalised to 100 on 3 10 https://www.trucost.com/trucost-blog/rate-raters-uncovering-best-practice/ December 2010. 12 AIMA JOURNAL | EDITION 119 13

BREXIT AND ITS IMPACT ON THE EUROPEAN ASSET MANAGEMENT INDUSTRY

A significant number of FCA only be managed by an EU appointed an authorised EU AIFM regulated UK firms and funds UCITS management company. in their jurisdictions. (“UK Entities”) and European Therefore, post-Brexit UK domiciled firms and funds (“EU authorised UCITS will no longer The eventual extension of the Entities”) have structured their qualify as UCITS but as non-EU passport to non-EU AIFs and operations on the basis of the AIFs and will lose their access to non-EU AIFMs is contingent passports available under the the passport. To address this upon positive advice from ESMA UCITS Directive, AIFMD and MiFID. potential consequence, a UK which may only be given once In the aftermath of the Brexit UCITS with European investors ESMA is satisfied that there vote, there was much uncertainty may need to consider providing are no significant obstacles as regards the manner in which an alternative solution, such as regarding investor protection, UK Entities and EU Entities could establishing an EU domiciled market disruption, competition continue to do business in the UCITS clone, to those investors. and the monitoring of systemic EU and the UK respectively, risks. As the AIFMD has already with the loss of these passports Furthermore, UK UCITS been implemented in the UK it (and therefore access to the management companies will no stands to reason that it could be European single market or the longer be permitted to manage granted equivalence. However, UK market, respectively) being EU UCITS post-Brexit. Therefore, the granting of such equivalence the most significant concern for the UK UCITS management to the UK and the likely timing participants in the EAMI. company of an EU UCITS must thereof is an eminently political be replaced by an EU UCITS decision that is not certain. Other The EU and EU Member States management company or the jurisdictions such as Switzerland have provided some helpful EU UCITS could become self- and Hong Kong have been clarifications on certain matters managed. deemed equivalent but have in this respect and this should not, to date, been able to benefit allow both UK Entities and EU AIFMD Management and from the extension of the AIFMD Philippe Burgener Introduction on the EAMI. Entities to take comfort that they Marketing passport. Of Counsel can continue providing their Unlike the UCITS Directive, the Maples Group The outcome of the UK’s 2016 Impact on the European Asset services on a cross-border basis AIFMD recognises the concepts of Where a UK AIF is managed by [email protected] referendum has already lead Management Industry regardless of the final outcome of ‘non-EU AIFs’ and ‘non-EU AIFMs’. a UK AIFM but is not marketed to significant changes to the Brexit. As a result, UK AIFMs managing in the EU, it will fall outside the Michelle Barry European asset management The EAMI is heavily regulated at UK AIFs may continue to do so scope of the AIFMD. Associate industry (the “EAMI”).1 These European Union (“EU”) level by UK Asset Management Industry post-Brexit. Maples Group changes and decisions made three primary regulatory regimes: The activities of UK authorised MiFID [email protected] by numerous financial services UCITS,2 AIFs, UCITS management However, to continue marketing A significant number of EU firms to relocate staff, operations (a) Undertakings for Collective companies, AFIMs and MiFID in Europe, the UK AIFM would UCITS management companies and balance sheet to other Investment in Transferable firms will be unaffected in the UK need to rely on the national and EU AIFMs delegate the European financial centres such Securities Directive (2009/65/ domestic market. In contrast, UK private placement regime portfolio management function as Luxembourg and Ireland and EC) (“UCITS Directive”); Entities’ access to the European (“NPPR”) of each EU Member to UK MiFID firms. UCITS and the outflows from UK domiciled market post-Brexit will no longer State in which it intends to AIFMD permit the delegation investment funds are likely to (b) Alternative Investment Fund be as seamless as it once was and market the AIF. The NPPR is not of this function to third country remain in place irrespective of the Managers Directive (2011/61/ there has been and will continue a harmonised regime and EU firms (“TCFs”) provided the TCF ultimate form of Brexit. Brexit EC) (“AIFMD”); and to be a certain level of disruption Member States have adopted a is appropriately authorised and its consequences may be to business. variety of approaches in respect and a cooperation agreement considered as the single most (c) Markets in Financial of the operation of the NPPR between the relevant competent significant European political Instruments Directive UCITS Management and with certain EU Member States authorities is in place. On 1 event of the last two decades and (2014/65/EU) (“MiFID”). Marketing gold-plating the NPPR and others February 2019, ESMA confirmed it is set to have a profound impact Under EU law, UCITS must be putting an outright ban on the that a multilateral memorandum domiciled in the EU and may marketing of AIFs that have not of understand (“MMoU”) had been 1 The focus of this article is solely on the asset management industry. As such, the implications of Brexit on the wider financial services industry have not been considered. 2 It is expected that a new UK retail regime equivalent to the existing UK UCITS scheme will be introduced. 14 AIMA JOURNAL | EDITION 119 15

agreed between ESMA and the domiciled in such EU Member The UK’s temporary permissions European securities regulators States may not be permitted to regime (“TPR”) will allow EU and as such, delegation of market in the UK. Entities that currently provide portfolio management to TCFs services or are registered for sale (including UK MiFID firms) could UCITS Management and in the UK via a passport offered continue. Marketing by the UCITS Directive, AIFMD EU UCITS will no longer be or MiFID to continue operating, The provision of services covered permitted to appoint UK UCITS for up to three years, in the UK by MiFID to European clients by management companies nor post-Brexit, while they seek the UK MiFID firms may prove more will they have access to the UK appropriate authorisation from difficult, especially if such services market through the passport. the UK regulators provided they are currently provided under Under UK law, EU UCITS will register under the TPR prior to the freedom to provide services qualify as AIFs and will only be Brexit. out of the UK. Although MiFID able to be marketed to retail The EU is not introducing a similar foresees the possibility of TCFs investors if the EU UCITS is regime to the TPR, however, such as UK MiFID Firms providing granted recognition under section certain Member States have their services in the EU post- 272 of the FSMA. In other cases, taken steps to ensure a transition Brexit, this possibility is subject to a notification for marketing to period is available to UK Entities harmonised conditions that may non-retail investors will need in their individual jurisdictions in be imposed by EU Member States to be made under the UK NPPR the event of a hard Brexit. individually, depending on the regime. Furthermore, EU type of clients the UK MiFID firm UCITS management companies Conclusion is targeting. Each EU Member managing UK UCITS may need to State will need to make a political consider whether they require Brexit continues to pose many decision as to the approach such an additional licence to continue challenges for participants in EU Member State will take. As doing so post-Brexit. the asset management industry. with AIFMD, any equivalence While many are hoping for the decision by the EU Commission AIFMD Management and best and preparing for the worst, remains highly political. Marketing it is clear that the post-Brexit As the passport attaches to the asset management landscape will UK MiFID firms that wish to AIFM rather than the AIF, the be different to what it was before continue providing their services impact of Brexit in the context Brexit. in the EU post-Brexit have of AIFs differs to that of UCITS. several options available to EU AIFs managed by UK AIFMs Although it may be tempting them. These include the setting may continue to be managed to rely on possible equivalence up of an EU based MiFID firm, by UK AIFMs; however, they will decisions in the various areas the establishment of a branch in lose access to the marketing discussed above to retain each Member State in which they passport. Furthermore, any UK access to the European or UK wish to provide their services AIFs managed by EU AIFMs will markets, such decisions are and, if and when an equivalence also lose access to the passport. eminently political, uncertain and decision is taken, the provision of In such circumstances, UK AIFMs unpredictable. services on a cross border basis managing EU AIFs and EU AIFMs (but then only to certain types of managing UK AIFs would need This has been recognised by clients). to rely on the NPPR to continue UK Entities and EU Entities as marketing the AIFs in the EU. they continue to copper fasten EU Asset Management Industry Essentially; any EU AIF that has their Brexit contingency plans Broadly speaking, the effect appointed a UK AIFM, any UK AIF and safeguard their access to of Brexit on EU Entities will be that has appointed an EU AIFM the European and UK markets less severe than the effect on or any UK AIF that has appointed respectively. UK Entities as EU Entities may a UK AIFM that is currently in a need to comply with UK specific marketing phase in the EU will be requirements to access the UK the most affected. market, whereas their access to the EU market remains UK’s Temporary Permission unchanged. Regime The FCA has provided significant There is a risk, however, that if clarification in respect of the UK funds cannot be marketed manner in which EU Entities may in certain EU Member States continue to access the UK market through the NPPR, the funds in the event of a hard Brexit. 16 AIMA JOURNAL | EDITION 119 17

SUSTAINABLE FINANCE: THE DRIVE FOR CONSISTENCY AND HARMONISATION IN GLOBAL REGULATION

Owen Lysak Sustainable finance, in broad developments build upon earlier a ‘stocktake’ of national initiatives Partner terms investments which take co-ordination efforts such as taken by securities regulators and Figure 1: IOSCO publishes statement on issuer disclosure of Clifford Chance into consideration environmental, the FSB Task Force on Climate other international organisations environmental, social and governance matters [email protected] social and governance (ESG) Related Disclosures, which was in the field of sustainable finance, factors alongside financial ones, launched in 2015 and the Central in order to assess the current In January 2019, IOSCO issued a statement on the inclusion of Jacqueline Jones are becoming increasingly Banks and Supervisors Network position and determine a firm environmental, social and governance matters when issuers disclose Knowledge Director popular with investors, resulting for Greening the Financial System, foundation on which to build. information material to investors’ decisions. Clifford Chance in a significant increase in launched in 2017. [email protected] demand for sustainable financial IOSCO’s second main workstream The statement notes that there is an increasing demand from products and investment funds Further moves towards global on sustainable finance focusses investors for ESG disclosures to help inform their investment and in recent years. This trend is regulatory co-ordination on growth and emerging markets, voting decisions. The number of issuers disclosing ESG information, likely to continue, driven not which are considered key to either on a voluntary basis or as a result of compulsory requirements only by growing institutional IOSCO future global sustainability. The at a local level, is also increasing. However, IOSCO notes that the investor demand, but also from In their 2018 Final Report Growth and Emerging Markets type and quality of ESG information disclosed varies in and between the retail sector, particularly from Making Waves – Aligning Committee (GEMC) has been markets, depending on, amongst other things, the disclosure younger, ‘millennial’ investors. the financial system with investigating the challenges frameworks used, the disclosure requirements and the definition of Another driver has been the sustainable development, the impacting the development of materiality imposed by the jurisdiction. IOSCO therefore encourages increased focus by policymakers UN Environment Programme sustainable finance in capital issuers to: and regulators on sustainability noted some of the global policy markets in emerging markets and the role played by ESG measures to advance aspects and the role of securities • Consider the materiality of ESG matters to their businesses, as factors, which has led in some of sustainable finance and the regulators. In June 2019 it well as the risks and opportunities they pose in light of their instances to the strengthening of ‘striking growth in international published a report containing business strategy and risk assessment methodology; voluntary codes, such as the UK initiatives to share experience, 10 recommendations aimed at • Disclose the impact or potential impact of ESG matters Stewardship Code for example, stimulate action and promote facilitating the development of considered to be material; or the introduction of specific cooperation on key rules sustainable finance and to help regulatory rules, such as the EU and standards’. Given such achieve a degree of international • Provide insight into the governance and oversight of ESG- Disclosure Regulation. proliferation, and particularly consistency and harmonisation, related material risks by, for example, disclosing risk assessment as this is likely to continue, the factors considered increasingly methodologies and the steps take to mitigate any identified risks; In these circumstances, there International Organisation of important given the cross-border and is the potential for overlapping Securities Commissions (IOSCO) nature of financial markets. The • Clearly disclose the framework(s) that have been used in or inconsistent requirements to current work on Sustainable recommendations are shown in preparing and disclosing material ESG information arise, which can be cumbersome Finance focuses on “stocktaking” Table 1. and costly for global firms to existing requirements to ensure Source: IOSCO overcome. This can also harm as much as is possible a co- Aside from these two main competition by raising barriers ordinated and harmonised workstreams, in January 2019 to entry, with consequent cost approach. In order to assist IOSCO published a statement The European Commission The Commission has now been implications for investors. regulators and other market on issuer disclosure on ESG - International Platform on given the green light to push participants to better understand matters (see Figure 1 below). Sustainable Finance ahead with its plans to create This prompts the question of how sustainability issues may This illustrates attempts by an International Platform on what could be done to avoid relate to the markets in which IOSCO to address the difficulties The European Union has been Sustainable Finance, which was these potentially negative they operate, in October caused by differing voluntary and at the forefront of regulating initially referred to in its reflection consequences. In this article, we 2018 IOSCO established the compulsory ESG requirements at for sustainable finance with a paper of January 2019 “Towards outline some recent attempts Sustainability Network to provide the national level, which are often package of regulatory proposals a sustainable Europe by 2030”. by policymakers, legislators a platform for IOSCO’s members problematic for asset managers announced in May 2018 to further The aim of the Platform is to and regulators to co-ordinate to share their experiences and seeking to obtain consistent and the objectives of the European create an international network on sustainable finance discuss sustainability-related accurate ESG data from issuers. Commission’s Action Plan for to advance sustainable finance, regulation and guidance, with issues. One of the initial tasks of Sustainable Finance in order to bringing together developed and a view to achieving a degree of the Network, as outlined in the harmonise practices across the developing countries to deepen international consistency and IOSCO 2019 Work Plan, has been EU. international cooperation on harmonisation. These recent to undertake a survey, essentially sustainable finance. The Council 18 AIMA JOURNAL | EDITION 119 19

of the European Union has Table 1: IOSCO recommendations for emerging markets jurisdictions to consider when issuing approved the EU negotiating The EU Sustainable Finance Action Plan – key regulatory regulations on sustainable finance position, so the Commission now measures for asset managers intends to enter discussions on 1. Integrating ESG-specific issues in overall risk assessment and governance: Issuers and other regulated the setup of the Platform with • The Disclosure Regulation, which formalises investor duties and entities should integrate ESG-specific issues, where these are material, in the overall risk assessment and Argentina, Canada, Chile, China, disclosure obligations in relation to ESG factors governance of these entities including at the Board level. India, Japan, Kenya, Mexico, Requirements to integrate ESG factors in investment decision- Morocco and South Africa. The • 2. Institutional investors: Consistent with their fiduciary duties, institutional investors, including asset making processes as part of the asset manager’s fiduciary platform would be open to other managers and asset owners, are encouraged to incorporate ESG-specific issues into their investment duty towards investors and beneficiaries. These will be further third countries willing to join in analysis, strategies and overall governance, and take into account material ESG disclosures of the entities specified through delegated acts amending MiFID2, AIFMD, the future. in which they invest. UCITS, IDD and Solvency II 3. ESG-specific disclosures, reporting, and data quality: Regulators should require disclosure with regard No indication is given at present • Requirements to incorporate sustainability when providing to material ESG-specific risks (including transition risks) and opportunities in relation to governance, of whether the Platform will financial advice. These will be implemented through delegated strategy and risk management of an issuer. This information should be part of the overall disclosure that address harmonisation of acts amending the suitability requirements in MiFID2 and IDD. the issuer makes under Principle 16. Where regulators determine that ESG-specific reporting is needed, regulation, although this is a regulators and issuers should aim to ensure adequate data quality for ESG-specific reporting, including, possibility, given the stance taken co-ordination and harmonisation overly prescriptive and granular among others, through updating listing rules, the use of external reviews and through the operation of by the European Commission of the many ‘hard’ and ‘soft’ regulatory requirements. other information service providers e.g., ESG rating providers, benchmarks and auditors. so far on this topic as reflected rules. In some respects, clearer At this point, it seems that regulatory proposals that came 4. Definition of sustainable instruments: Sustainable instruments should be clearly defined and should refer regulatory guidance could help to standard setters and regulators from the Action Plan. to the categories of eligible projects and activities that the funds raised through their issuance can be promote consistency that would are for the most part at the used for. be beneficial to the market e.g. ‘fact-finding stage’, attempting ESMA Co-ordination Network on the scope of ESG disclosure to establish a baseline of global 5. Eligible projects and activities: Funds raised through sustainable instruments should be used for projects on Sustainability requirements. However, this ESG initiatives and the ways in and activities falling under one or a combination of the broad ESG categories listed below: does not necessarily mean that which these can be better co- • Environmental (renewable resources; combatting/mitigating climate change; pollution and waste; and While sustainable finance has new regulations are required, as ordinated. Working towards a other environmental opportunities); been at the forefront of the it could be argued that market degree of global co-ordination Commission’s political agenda, demand, from both investors and and minimum standards could Social (human capital; product liability; and other social opportunities); • steps have also been taken at customers of portfolio companies, be beneficial, particularly if • Governance (corporate governance; corporate behaviour). the national level by several EU has resulted in ESG factors being predicated by a principles-based member states including, for integrated into their dealings in approach. As such, the output of It will be up to each GEMC member to define the list of eligible projects and activities for their example, Germany and France. any event, without the catalyst of the various initiatives currently jurisdictions, taking into account that an eligible project or activity cannot, at the same time, do any The UK has also taken steps to regulation. Investors increasingly in progress could provide a significant harm to any of the other ESG categories. further ESG and sustainability demand ESG disclosures from valuable contribution to global objectives, which are likely to managers, for example, often understanding and promotion 6. Offering document requirements: Regulators should establish requirements for the offerings of continue in a similar tack post in relation to the manager’s of sustainability issues and drive sustainable instruments including, among others, the use and management of the funds raised through Brexit. This prompted the EU own ESG credentials, as well as the development of ESG practices the issuance of such instruments, and the processes used by issuers for project evaluation and selection. Securities Regulator, ESMA, in relation to their investments globally. to establish the Co-ordination and such managers are often 7. Ongoing disclosure requirements: Regulators should establish ongoing disclosure requirements Network on Sustainability (CNS) contractually bound to report regarding the use of the funds raised through the issuance of sustainable instruments including the in May 2019, in order to foster on ESG to their investors under extent of unutilized funds, if any. This could include the use of scenario analysis in the context of the the co-ordination of national negotiated fund agreements. recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD). competent authorities’ work on In addition, achieving 8. Proper use of funds: Regulation should provide for measures to prevent, detect and sanction the misuse sustainability. The CNS will be international co-ordination of the funds raised through the issuance of sustainable instruments. responsible for the development and harmonisation across of policy in this area, with a the spectrum is likely to be 9. External reviews: Issuers should consider the use of external reviews to ensure consistency with the strategic view on issues related definition of the sustainable instruments and eligible projects as provided in Recommendation 4 and 5. difficult, not least because the to integrating sustainability political appetite for introducing 10. Building capacity and expertise for ESG issues: Regulators should analyse the gaps in capacity and considerations into financial regulation on sustainable finance expertise with regard to ESG-related issues mentioned in the above recommendations and consider regulation. and in precisely what form, varies targeted capacity building to address these gaps. Regulators should also have appropriate monitoring considerably from country to mechanisms in place to encourage application of these recommendations. Co-ordination or more country and from sector to sector. regulation? This explains the preference Source: IOSCO in the market for a ‘principles- With the increasing global focus based approach’, being a practical on sustainability, together with and flexible way forward which ESG measures being introduced allows a tailored solution to the in more and more countries, it is ESG considerations relevant to a perhaps inevitable for there to particular scenario, rather than be calls for greater international imposing a ‘one-size fits all’ set of 20 AIMA JOURNAL | EDITION 119 21

FRIEND OR FOE: WHAT DOES ARTIFICIAL INTELLIGENCE MEAN FOR THE PRIVATE CLIENT?

Stephanie Hickmott, MBA, CFA These days there’s no Today’s AI is more accurately Portfolio Manager shortage of articles and defined as artificial ‘narrow’ Leith Wheeler Investment white papers on how intelligence because it performs Counsel Ltd. specific tasks and operates within [email protected] artificial intelligence (“AI”) limited, predefined ranges. is dynamically altering For example, Siri uses natural both our personal and language processing to enter work environments. From your specific information request IBM’s Watson to Apple’s into a search engine and provide you with the results. Siri cannot Siri and Amazon’s Alexa, AI perform other tasks, such as development and adoption order Uber Eats, or respond to is rapidly accelerating. In general queries that require fact, worldwide spending more comprehensive knowledge. on AI systems is expected In contrast, most fictional AI represents artificial ‘general’ to grow to $52.2 billion by intelligence, because it has the 2021.1 cognitive ability to perform a broad variety of intelligent But what does AI mean for the tasks with some level of human private client? Not much is written consciousness. from a client’s perspective. Will your future portfolio strategy The main advantage of narrow AI be determined by an intelligent applications in use today is their machine? Will human holographs ability to quickly scan extremely and android replicants represent large quantities of data, discover AI in Wealth Management minimums, robo-advisors have relies on the individual investor the next generation of Investment patterns and make reasonable helped broaden access to formal to provide the data necessary to Advisors and Portfolio Managers? predictions. For example, a The most well-known example of investment advice, as the systems determine their risk profile and If they look like the cast in Blade human loan officer generally AI in wealth management today can scale to take on extremely asset mix. This model works well Runner 2049, will you even care? looks at a few criteria to evaluate is the robo-advisor platform. large numbers of clients with any in rising markets, when it’s easy your credit application (e.g., Robo-advisors (or “robos”) size of portfolio. For private client to love risk, but what happens AI in a nutshell assets, credit score, income, emerged in 2008 as a low-cost, investors, who are accustomed when there’s a significant market age). However, an AI application digital alternative to a personal to working with human pullback and your portfolio of In broad terms, AI is the ability determines your creditworthiness financial advisor for retail professionals, the advance of ETFs drops by 15%? Will you rush of a machine to copy intelligent from thousands of variables, investors. Today, robo-advisors robo-advisors has helped fuel to log into your digital advisor and human behavior. It is not a single including your internet browsing, allocate approximately US$398 more widespread investment modify your profile to “LOW RISK” technology, but rather a family social media activity, shopping billion of worldwide investment in robust, automated service at the worst possible time? Who of technologies, including natural habits, geolocation data and assets using automated, rules- delivery tools by their wealth will prevent you from making this language processing, computer more. Taken alone, the predictive based models.2 You fill out management providers. irrational investment decision vision, automated speech power of each variable is not an online survey about your that could materially impact your recognition, advanced machine meaningful. But when combined, age, investment goals and While financial journalists and net worth? Who will give you the learning, image recognition these variables can lead to risk tolerance, and the robo big-name consultants have big picture? and robotics. Progress in AI accurate assessments about application selects an assortment got great mileage out of the has been driven by significant your status as a borrower. This of exchange-traded funds (ETFs) potential disruptive impact of Along with robo-systems, improvements in computing capability has countless uses, for your portfolio. robos within the investment financial institutions have power, the explosion of big data such as automated customer industry, the reality is that this been investing in AI to extract and advances in algorithmic support, self-driving cars and For new investors who are still narrow form of AI cannot replace value from big data and better science. rapid medical diagnosis. accumulating assets and do not human advice. Even with recent understand what products and meet private client portfolio advances, robo software still services their clients want. For

1 The International Data Corporation (IDC) Worldwide Semiannual Cognitive Artificial Intelligence Systems Spending Guide. 2 www.statista.com/outlook/337/104/robo-advisors/worldwide 22 AIMA JOURNAL | EDITION 119 23

example, Australia and New better service, from their data such complex decision making Zealand Banking Group Limited being used.6 At the same time, and relationship building. The (ANZ) was an early adopter of AI financial institutions have no concept of a flawless, intelligent, technology with the use of IBM’s choice but to continue investing replicant advisor with human-like Watson to understand client in data privacy and governance consciousness will have to remain behaviour.3 BlackRock acquired programs to maintain client trust. as sci-fi movie material – at least a digital advice platform in 2015 until we have artificial ‘general’ to enhance and inform their An existential threat? intelligence. And if this day ever investment decisions.4 UBS uses comes, let’s just hope we’re a technology called Sqreem Tech leaders like Elon Musk, prepared. (Sequential Quantum Reduction Stephen Hawking and Bill Gates and Extraction Model) to identify have issued vocal warnings about typical client patterns in large AI advancing beyond human amounts of unstructured data.5 control (for some of you, this More and more, fintech startups may evoke fond Terminator are unveiling applications that memories). Unfortunately, we use AI to synthesize news, market don’t have room to explore data and product information for their hypothesis in this blog. wealth managers to share with However, it does bring us back their clients. to our opening question: Will the next generation of investment So, what does all this mean for advisors and portfolio managers you, the private client? At the be represented by some form of very least, you should expect intelligent machine? to receive, in real time, more THROUGHOUT THE LIFECYCLE OF YOUR FUND, tailored, personalized insights We believe the advisor and that reflect the knowledge and portfolio manager role will OUR GLOBAL FUNDS & INVESTMENT expertise of the entire firm, evolve, not disappear. While AI MANAGEMENT GROUP IS WITH YOU delivered through your preferred is superhuman at dynamically channel. Your wealth manager processing information and doing EVERY STEP OF THE WAY will become better at predicting digital detective work, it is unable your financial needs and life- to choose its own goals or think KEY CONTACTS changing events based on your creatively – not to mention the digital footprint. Armed with fact that AI outcomes are devoid dashboards that push through of empathy and entirely based Global Head of Hedge Funds Business Development Lead, relevant data, portfolio metrics, on the data and assumptions Practice Global Funds & Investment alerts and automated decision- with which they are shaped. The Management making, advisors and portfolio complex, interpersonal nature of Matthias Feldmann Fiona Grafton managers will spend less time investor risk profiling requires a Partner Senior Business T: +852 2825 8859 Development Manager preparing for meetings and more flexible and robust understanding E: matthias.feldmann@ T: +1 212 880 5602 time providing proactive advice of human needs and emotions. cliffordchance.com E: fiona.grafton@ and recommendations. For this reason, wealth cliffordchance.com management will remain both You’re not alone if the thought an art and a science, balancing of this radically improved service technological progress with the experience triggers some privacy human touch. alarms. However, today’s private client is a digital immigrant at In conclusion, private clients best, who still likes voicemail, need not worry that AI will turns off auto location settings completely take over their and remembers the original investing process and experience. Blade Runner cast. Social experts More realistically, robos and say that the next generation of intelligent systems will eventually Abu Dhabi • Amsterdam • Barcelona • Beijing • Brussels • Bucharest • Casablanca • Dubai • Düsseldorf • Frankfurt • Hong Kong private clients is far less likely work alongside investment Istanbul • London • Luxembourg • Madrid • Milan • Moscow • Munich • Newcastle • New York Paris • Perth • Prague • Rome to have digital-spying qualms, professionals, allowing them to São Paulo • Seoul • Shanghai • Singapore • Sydney • Tokyo • Warsaw Washington, D.C. Riyadh* provided they see value, such as focus more on high-value tasks * Clifford Chance has a co-operation agreement with Abuhimed Alsheikh Alhagbani Law Firm in Riyadh Clifford Chance has a best friends relationship with Redcliffe Partners in Ukraine. 3 “The evolution of Robo-advisors and Advisor 2.0 model” ©2018 Ernst & Young LLP 4 “The evolution of Robo-advisors and Advisor 2.0 model” ©2018 Ernst & Young LLP www.cliffordchance.com 5 “Transformative Nature of Artificial Intelligence (AI) In Wealth Management” ©2017 The Capital Markets Company NV (Capco) 6 “Applying Artificial Intelligence in Wealth Management: Compelling Use Cases Across the Client Life Cycle”, WealthBriefing, December 2017 24 AIMA JOURNAL | EDITION 119 25

SETTING UP AN ALTERNATIVE FUND IN EUROPE: A GUIDE FOR US-BASED MANAGERS

Ian Holden Europe calling for European investors. expertise to support investment Types of structures include: European Head of Hedge Fund funds, including banks, the Investment Company in RAIF: THE NEW ALTERNATIVE Services By most measures, the US is the First step: Get to know AIFMD depositaries, administrators, tax Risk Capital (SICAR) regime, FOR ALTERNATIVES SS&C GlobeOp largest market for alternative advisors and legal experts. which allows for the creation [email protected] funds, encompassing hedge, The Alternative Investment Fund of a private or public company One way to accelerate the launch private equity, private credit, Managers Directive (AIFMD) is The choice of a domicile location to raise funds and invest in of a European fund entity is real estate and real asset funds. the primary pan-EU governing may come down to the type of risk-bearing capital; Special through the use of a Reserved Europe runs a close second, and regime for alternative investment fund you wish to establish and Investment Funds (SIFs), flexible Alternative Investment Fund or beckons many US managers funds. The main feature of where similar funds tend to vehicles that are subject to lighter RAIF. Established by Luxembourg looking to tap into new sources AIFMD is a “passport” that allows gravitate. Proximity to investors regulatory supervision and authorities under a 2016 law, of investors and capital. It’s not complying firms to market their is another factor to consider. If targeted to qualified investors; the RAIF allows you to utilise that easy, however. US funds funds to professional investors you are setting up a European and most recently, Reserved the services of an authorised cannot simply invite Europeans across the EU as a single market. fund at the behest of specific Alternative Investment Funds Alternative Investment Fund to invest and watch the euros A US manager seeking to attract investors, they will likely have (RAIFs), developed as a more Manager (AIFM) instead of going flow in. Europe is quite different or accommodate European a say in the decision as well. flexible form of fund within the through the local regulatory from the North American investors may need to set up an However, if you are just starting AIFMD framework. (See sidebar.) approval process under the market from a regulatory and EU-based, AIFMD-compliant entity to survey the landscape, it’s country’s Commission de structural perspective. The that essentially replicates that instructive to understand some Luxembourg tends to attract Surveillance du Secteur Financier private fund marketplace is more manager’s US fund’s strategy. of the nuances that distinguish limited-partnership structures (CSSF). Unlike Luxembourg’s SIF tightly regulated and investor Under AIFMD, the fund must have each location. and closed-end funds typical or SICAR fund structures, the RAIF protections far more stringent in a registered EU-based manager of private equity and real is not subject to CSSF governance. Europe than US managers may be (AIFM) and use a depositary Luxembourg estate. The country boasts The AIFM can be domiciled in any used to. and fund administrator licensed its noteworthy role in the EU member state. In addition to by the EU authorities. The Bounded by France, Germany development of the real estate faster time to market, the RAIF In particular, in order to obtain fund will further be subject to and Belgium, the Grand Duchy fund market, offering a range structure affords a greater degree investment from a European AIFMD disclosure and reporting of Luxembourg is Europe’s of legal structures and flexible of legal flexibility and lower institutional or private investor, requirements, most notably the largest fund domicile center regulatory requirements. administrative costs than other you are expected to have a Annex IV report, comparable to and the second-largest in the types of funds operating under Europe-domiciled investment the US Form PF. world after the US. In contrast to Ireland CSSF supervision. vehicle. That in turn raises the tensions experienced by its questions of how to structure Where to domicile? A quick larger neighbors in recent years, Ireland is reportedly the domicile RAIFs may be organised as such a fund, the regulatory tour of Europe’s top fund Luxembourg is a comparative for 5% of global investment fund umbrella funds with one or more hurdles you need to go through, destinations beacon of political, social and assets, making it second only compartments or sub-funds, and where it makes sense economic stability. Most of the to Luxembourg in Europe and each with its own specifically to domicile the fund among Europe’s prominent alternative top US, UK and German asset third-largest in the world. As the defined investment strategy Europe’s major domiciling centers fund domiciling locations – management brands have UK wrestles with its decision to and policies. RAIFs are intended – Luxembourg, Ireland or the Luxembourg, Ireland (specifically chosen Luxembourg as their leave the EU, Ireland touts its for well-informed, professional Channel Islands of Jersey or Dublin), and the Channel Islands primary European distribution commitment to remain in the investors, including institutional Guernsey. of Jersey and Guernsey – have center. Union and continue to provide and qualified private investors, much in common. All have full market access to all member professional investors and It certainly pays to have an on- committed substantial resources The tiny country (population: countries. investors investing certain the-ground guide with experience to servicing the alternative 591,000) has spent decades minimum amounts (EUR 125,000) across the European market fund sector. All claim to have developing a strong legal The Irish fund industry prides or who qualify as well-informed to help you navigate these tax structures favorable to and regulatory framework to itself on an open, transparent investors. issues. In the meantime, this investors and flexible regulatory serve the global investment and well-regulated investment paper is intended to serve as an frameworks. Each has a sizeable, community. It is host to all environment, with a strong introduction to the regulatory well-educated professional corps alternative fund types, including emphasis on investor protection requirements and domiciling engaged in the fund industry. hedge, private equity, venture and an efficient tax structure. options for US managers And each has a well-developed capital and real estate funds, Some 16,000 professionals are contemplating setting up a fund infrastructure of specialized as well as funds of funds. employed exclusively in the 26 AIMA JOURNAL | EDITION 119 27

servicing of investment funds, Jersey are governed by the Jersey accounting challenges. including 4,000 dedicated to Private Fund regime or JPF. Under If you are exploring European alternative investment funds. JPF rules, a fund can be structured opportunities, we have the Ireland tends to appeal to more as a limited partnership, company knowledge of local regulations, open-ended types of vehicles or trust, and may be either open tax laws, customs and resources such as hedge funds. There has and closed-ended. All investors to provide comprehensive been much speculation in 2019 must qualify as “professional” or guidance, with no bias toward about when Ireland will update “eligible” investors. In most cases, a particular domicile. Whether its legislation for International a JPF manager is not required you are actively engaged with Limited Partnerships (ILP), which to be licensed in Jersey, but the European investors or simply will be attractive to closed-end fund is required to appoint a testing the waters for expansion, types of vehicles. designated service provider, contact us to discuss your usually a fund administrator, in alternatives. In 2015, Ireland introduced a Jersey. vehicle designed to reduce the cost and complexity associated Guernsey’s Private Investment with establishing and maintaining Fund or PIF regime is similar a fund. The Irish Collective Asset- to the JPF, but with a few Management Vehicle (ICAV) allows notable differences. A PIF can for the creation of funds without be structured as a limited going through the process of partnership, company or trust, incorporating or become public and may be either open and limited companies (plcs), and closed-ended. It can have up to which therefore are not subject to 50 investors, and they need not rules or requirements intended be deemed professional. Unlike for other company types. Existing the JPF, a PIF manager must alternative investment funds in be licensed in Guernsey. A PIF, Ireland can continue to operate too, must appoint a Guernsey- as usual or have the option to designated administrator. Both convert to ICAV status. Non- the Jersey and Guernsey regimes Irish investment companies can are intended to enable managers migrate into Ireland and become to set up funds more quickly, an ICAV through a relatively easily and at less cost. straightforward process. Jersey and Guernsey host Channel Islands: Jersey and both closed and open-ended Guernsey funds, plus hybrids. Jersey has traditionally been partial to real An interesting alternative assets funds and Guernsey more to Europe’s two larger fund toward private equity, although centers, the English Channel that is changing as the Jersey Islands are politically and fiscally market has grown in size in recent autonomous British Crown years. Dependencies, but not part of the UK or the EU. As “third countries” SS&C in Europe to the EU, Jersey and Guernsey have bilateral agreements with SS&C is one of the few fund a majority of EU countries that administrators with a truly global enable marketing across the footprint, including an extensive EU through National Private team of experts across Europe. Placement Regimes (NPPRs). The We are licensed to operate in all NPPR provides a quick, efficient of Europe’s key fund jurisdictions and low-cost alternative to the full and we have specialized expertise AIFMD passport. Brexit will not in all fund types. Most recently, in impact upon the Channel Islands’ response to increasing investor agreements with EU countries. demand, SS&C has dedicated significant resources to support Although close geographically, real asset funds, a rapidly Jersey and Guernsey are two growing alternative category that distinct jurisdictions. Funds in poses unique operational and 28 AIMA JOURNAL | EDITION 119 29

THE SEC’S FORM PF DATA USAGE: BETTER DATA POLICIES

David A.A. Ross Regulators making good use of Better data means better convertible bonds, etc. must be example, Form PF has been report, the initial stages are Global Head of Marketing the data policies supplied) that must be submitted regularly shared with the Financial often marred with operational Viteos Fund Services by registered investment funds. Stability Oversight Council headaches, and Form PF was [email protected] At the point when Form PF By acquiring deeper and more (FSOC) over the last six years, not an exception. At the time, (private fund) was first conceived granular insights into private Enforcement boosted by and the Federal Reserve Board managers complained the form under the Dodd-Frank Act in funds’ operating models, the analytics, automation and risk since July 2018. The SEC also was excessively complex, detailed the early 2010s, its architects SEC has obtained a better metrics passes on Form PF information and risked overlapping with other principally viewed it as a resource understanding about the industry to the Office of Financial regulatory reports elsewhere by which the Securities and and its impact on broader In 2012, many industry experts Research (OFR), a unit within the such as the Annex IV, introduced Exchange Commission (SEC) could financial markets, as well as warned that Form PF submissions Department of Treasury, along under the EU’s Alternative accumulate data on the private vice versa. Furthermore, careful risked causing an information with international bodies such Investment Fund Managers funds industry (e.g. hedge funds, analysis of Form PF’s contents overload at the SEC, which as the Financial Stability Board Directive (AIFMD). Today, the private equity, etc.) enabling for has enabled regulators to identify had the potential to hinder its (FSB). A data sharing agreement compilation of Form PF is a fairly better supervision of potential emerging market trends on a ability to spot frauds quickly was also recently signed between seamless exercise, which is either systemic risks. Nearly seven timely basis. For instance, the – an admonition that touched the SEC and the International performed in-house at managers years have elapsed since the first SEC acknowledged Form PF a particularly raw nerve at the Organisation of Securities or delegated to competent filings began and despite initial submissions were pivotal in regulator in the context of Commissions (IOSCO). Again, this third party providers. As firms misgivings that the SEC would providing them with early and its failure to identify Bernard is in marked contrast to pre- acclimatised to its requirements, struggle under the weight of all invaluable information about the Madoff’s decades-long criminality. 2008 behaviour when regulators Form PF became less of a burden, of this reported information, growth of liquid alts, a subset However, the SEC’s application usually operated in silos. and is now a process that is fully nothing of the sort materialised. of hedge funds offering mutual of analytics, automation and integrated into the operations of In fact, the SEC – like many other funds to retail clients.2 This gave risk metrics has turned the Nowhere has this collegiality fund managers. regulators – is making good use the regulator plenty of time agency into a far more potent been more apparent than in the of the data. to react to this development regulatory force. Nowadays, the recent regulatory consultations Likewise, the SEC – who faced a and introduce liquidity risk SEC is increasingly and effectively on leverage. Following on from barrage of criticism in 2011/2012 This has happened for several management requirements for benchmarking managers’ Form an FSB report evaluating the from industry stakeholders reasons. Firstly, the SEC has the asset class. PF filings against their ADV structural vulnerabilities in asset warning them that Form PF developed an extensive range of submissions,4 and other available management, the International risked overwhelming their limited sophisticated tools to help it sift Past experiences – albeit not information. Not only does Organisation of Securities resources – has proven the through the enormous volumes necessarily good ones – shaped this support the SEC when it Commissions (IOSCO) began sceptics wrong. Not only is the of Form PF data. Through the by Form PF’s troubled early conducts routine examinations consulting with the industry about SEC using the data intelligently adoption of automation in these existence have also helped of managers, but it helps them developing a framework by which as a tool to shape policy, but it rigorous analytical processes, finesse the SEC’s thinking in identify inconsistencies in to accurately measure hedge fund recognised it made errors when the regulator is now in a strong regards to some of its more reported data on exposures, leverage.5 This comes as the SEC Form PF was first adopted, and position to identify outliers in recent rule-changes, thereby liquidity, and returns. released data showing that while has worked diligently to avoid Form PF submissions, such as allowing it to avoid past mistakes. hedge funds’ cash borrowings repeating those same mistakes. In anomalies around performance, For example, the SEC said lessons Better cooperation across had reduced, the role of synthetic addition, Form PF has abetted the liquidity, investment exposures, learned following Form PF’s regulatory agencies leverage has expanded quite SEC with conduct enforcement, use of derivatives or the extent implementation were onboarded significantly from $10.2 trillion in and a lot of the report’s contents of leverage.1 Simultaneously, when it rolled out amendments One of the biggest criticisms of 2017 to $14 trillion in 2018.6 By are now routinely being circulated the data itself has improved to Form ADV (i.e. which market regulators in the US in disclosing data on a cross-border with domestic and international organically as investment firms demanded more information the immediate aftermath of the basis, regulators are helping to regulators, thereby helping achieve better consistency in how from investment firms about their financial crisis was that they failed curtail systemic risks. agencies with market surveillance. they report, again something separately managed accounts) to liaise with each other. Since As a result, Form PF is playing an that has been facilitated by SEC and launched Form N-PORT,3 a then, there has been deeper The evolution of Form PF instrumental role in suppressing feedback. portfolio holdings disclosure coordination and consultation systemic risk. requirement (where details on across regulatory bodies. For As with nearly every regulatory leverage, derivatives, use of

1 SEC (2017) Annual Staff report relating to the use of Form PF data 4 SEC (2018) Annual Staff report relating to the use of Form PF Data 2 SEC (2018) Annual Staff report relating to the use of Form PF Data 5 IOSCO (November 14, 2018) IOSCO seeks feedback on proposed framework for assessing leverage in investment funds 3 SEC (2018) Annual Staff report relating to the use of Form PF Data 6 Financial Times (January 13, 2019) Hedge fund leverage risk comes under scrutiny 30 AIMA JOURNAL | EDITION 119 31

ESG DUE DILIGENCE – “TRUST BUT VERIFY”

Alex Wise Environmental, Social and Castle Hall has observed a sovereign wealth investors have training policy on HR matters they were five years ago. Equally, Head of Australia and New Governance (ESG) issues have bifurcated approach emerging begun to question, for example, could also be beneficial not only five years from now, asset Zealand rapidly become central to the in ESG due diligence. First, as whether their beneficiaries to external perceptions but also manager practices which are Castle Hall Diligence stated priorities of many large would be expected, investors would support plan assets being to improvements in culture at likely “acceptable” today may have [email protected] asset owners around the world, are reviewing the sustainable allocated to a manager with little the firm. Indeed, we believe ESG been superseded. However, the leading the asset management investment strategy of an asset gender diversity and one or more criteria can be used as a valuable starting point to due diligence is a Jon Deneuville industry to increasingly offer manager during the investment examples of #MeToo allegations. proxy for assessing the culture baseline understanding of current ESG Analyst responsible investment strategies due diligence process. At Castle Equally, would plan members (the of a manager. A large hedge behaviours across the asset Castle Hall Diligence to their clients. Today, new Hall, we don’t believe it is ultimate asset owner) support fund we spoke to recently put it managers included within an asset [email protected] ESG, SRI, and Impact funds are enough to simply ask whether buying a product from an asset this way: many of their staff are owner’s existing portfolio. With being launched weekly, with the manager has implemented manager who has failed to adopt highly talented and have a choice that information, investors can alternative investment firms now a responsible investment policy policies related to whistleblowing, of where to work, thus having an enhance their decision making, participating in the trend. Though or if they are a UN PRI signatory. workplace harassment or employer with strong, positive, helping better align the external responsible investing is more Though these matters are provision of same sex benefits? culture characteristics is highly manager selection process with common in long only, private important and may demonstrate important. the values of the asset owner. equity and real assets, AIMA, a firm’s opening commitment One immediate example: virtually in its recent ESG Primer, has to ESG, it is merely a starting every large, institutional investor In this nascent space, “best highlighted how hedge funds are point. Can the manager actually we have spoken to has, over the practices” are a journey: investor increasingly seeking compatibility evidence the application of their past year, conducted systematic expectations today around ESG with responsible investment ESG policy and the 6 UN Principles training around issues such as issues are likely greater than strategies – from screening the for responsible investing workplace bullying, unconscious investment universe to short throughout their investment bias, microagressions and mental selling companies due to poor approach (at a more basic level, health. Equally, virtually none of ESG performance. a manager may say that they the independent asset managers update their ESG policy every we have spoken to appear to Given the myriad of responsible year – yet the document supplied have implemented formal training investing strategies and the lack is dated from early 2017). Key programs in these areas, as of of agreed definitions around questions posed by allocators yet. This illustrates a clear gap ESG criteria, however, investors include: Who is responsible for between investor and asset are acutely aware of the risk gathering and analyzing ESG data manager priorities. of “greenwashing”- when an to integrate into risk management asset manager exaggerates and valuation models? What For hedge funds, relatively modest integration of ESG factors data is obtained? When does the changes can work towards into their investment decision manager consider ESG during the improving ESG culture. For making process, or merely offers investment process – at the very example, carbon offsets on flights “green” platitudes without any beginning, or only at the end as a are relatively cheap and could real substance behind them. negative screen? Where does the easily assist towards decreasing Distinguishing virtue signaling manager source their data from? environmental footprint. In the from a genuine commitment S, or social, area, a policy on to sustainable investment has Second, investors are also sexual orientation discrimination become a new focus in the moving to assess the governance, could be beneficial to attract external manager selection culture and behaviours of employees that might otherwise process. asset managers themselves, feel excluded. The manager entirely separate from the ESG could also conduct a formal Against this background, investors characteristics of their investment gender pay gap survey (this is are transitioning to more detailed mandates. For asset owners, it is increasingly required by law in “trust but verify” due diligence increasingly important to ensure certain countries) to address on the ESG capabilities of asset cultural alignment with the asset any disparities in pay within the managers in their portfolios or managers to whom they delegate organization. From a governance proposed for new allocation. capital. Large pension and perspective, a documented 32 AIMA JOURNAL | EDITION 119 33

DISTRIBUTION TO INVESTORS IN SWITZERLAND

Luis Pedro Switzerland is an attractive to Swiss investors have a Swiss Table 1 CEO market for foreign investment representative. Qualified Investors Non-Qualified Investors Oligo Swiss Fund Services funds with very specific, yet [email protected] easy to fulfil, requirements for Under the CISA, Swiss investors Regulated Unregulated distribution. Switzerland is not are segmented into three groups, • Banks • Pension funds with professional • Investors other than Qualified Lisa Weihser part of the EU, and distribution as shown in table 1. • Security dealers treasury management Investors Compliance Officer legislation is different. To ensure • Regulated fund management • Family Offices Oligo Swiss Fund Services that all regulatory requirements, The 2020 upcoming regulatory companies • UHNWI (subject to conditions) [email protected] including representation, highlights paying agent and regulators • Insurance institutions • Independent wealth managers authorization are met, choosing The Swiss Federal Financial • Other regulated companies • Companies with professional a reliable Swiss representative Services Act (FinSA) and the Swiss treasury management is essential. Once funds have Federal Financial Institutions Requirements Requirements Requirements been authorized for Swiss public Act (FinIA) are expected to distribution, fund managers and enter into force in 2020. They • None • Appoint a Swiss representative • Appoint a Swiss representative fund distributors will expand were drafted as a response to • Appoint a Swiss paying agent • Appoint a Swiss paying agent the scope of potential investors the 2009 financial crisis and • Obtain an authorization for through access to big Swiss with the purpose of meeting public offering by FINMA distribution platforms, including international standards, most • Publish legal documents on a those from well-established importantly the recognition of recognized electronic platform banks. the so-called “equivalence” under • Translate fund documents to a the “third-country rules” under Swiss official language Switzerland ranks fourth among MiFID II. Through the legislative the largest asset management proposal, Switzerland envisages locations in Europe. The total the harmonization of its financial Table 2 volume of assets entrusted markets regulation with MiFID II Professional Clients Private clients by investors in Switzerland in order to facilitate cross-border • Independent wealth managers • HNWI who opt out of the pri- • Individuals and HNWI amounted to CHF 1,129.3 billion activity to enhance the Swiss vate client category (as of 23 April 2019). At the financial center’s competitiveness, • Regulated insurance • Family offices without end of February 2019, the total while taking due account of institutions • Family offices without a professional treasury volume was CHF 1,121.5 billion, the desire for enhanced client • Banks a professional treasury management management which opt out of which represents an increase of protection. • Pension funds and companies • All non-Professional Clients the private client category CHF 7.8 billion or 0.7% in only two with a professional treasury months. FinSA redefines the client management categories in table 2. • Security dealers The Swiss Regulatory Framework today Professional investors under • Regulated fund management FinSA will be considered regulated companies Switzerland is not subject to the qualified investors and some • Other regulated companies AIFMD rules. The distribution private investors, with financial Requirements Requirements Requirements of foreign funds in Switzerland assets exceeding CHF 500,000, • Register the fund advisors • Register the fund promoters • Register the fund promoters is regulated by a specific set that have sufficient knowledge • Appoint a Swiss representative of rules, where the function of about the risks of investments as • Appoint a Swiss representative • Appoint a Swiss paying agent the Swiss representative plays a result of their personal training • Appoint a Swiss paying agent a central role. The Collective and experience in the financial • Obtain an authorization for Investment Schemes Act sector, may “opt-out” and be public offering by FINMA (CISA) came into full force on 1 considered Professional Clients. • Publish legal documents on a March 2015. The modifications recognized electronic platform introduced by the CISA require that all foreign funds distributed • Translate KIIDs into a Swiss official language 34 AIMA JOURNAL | EDITION 119 35

fund. A list of Swiss paying agents • Act as a global distributor will be provided for the client to organise retrocessions to choose from. An onboarding for placement agents in process follows, which typically Switzerland; takes a few weeks, during which • Help choosing a suitable Swiss the representative executes legal Counsel when required; due diligence work on the fund, a representation contract is • Assist the fund with cross- established, and the fund’s legal border registration in multiple and marketing documents are countries within and beyond amended for distribution in Europe; Switzerland. This also entails filing • Publish fund information of the documents with FINMA and documents on electronic and requesting that the fund be platforms dedicated to Swiss authorised for public distribution investors; in one of the Swiss official languages. This makes the Swiss representative an ongoing point In line with the EU regulation of reference, source of business, on PRIIPs , the publication of a and long-term partner for a fund’s KIID is compulsory if a financial distribution activity in Switzerland. instrument is offered to private clients. From 2020, if a financial For any question concerning funds instrument is offered publicly, representation and distribution only the KIIDs will need to be in Switzerland, please feel free to The new register of fund Clients will no longer be to the regulatory fees, the cost translated into a Swiss official contact Oligo Swiss Fund Services advisors required to appoint a Swiss of a Swiss representative and language and published. Other (a regulated Swiss representative representative and a Swiss paying a Swiss paying agent, foreign fund documents will no longer for funds addressed to both Within six months of FinSA/FinIA agent. However, they will not funds authorized for public need translation. professional and private Swiss taking effect, fund promoters of be able to be offered to private offering face higher initial and investors) at [email protected]. those financial service providers, clients. To avoid undesired recurring costs. These funds Choosing a Swiss representative not subject to supervision in publication to private clients, also have the most complete Switzerland in accordance any communication with Swiss registration in Switzerland; The role of the Swiss with Art. 3 FINMASA and client investors, including mailing lists they comply with all the points representative is to ensure advisors of foreign financial and website content, requires that institutional investors like that the funds’ distribution service providers, will be required strict monitoring. HNWI and insurance companies, banks and activities comply with Swiss to sign up to a client advisors’ family offices will require special pension funds may require. They laws. In addition to the legal registry (Art. 22 FinSA). This care to understand whether can be offered to professional and procedural expertise, Swiss body will verify that advisors they opt-out of the private client and private clients alike, reach representatives can: have sufficient expertise and category (and require a paying a broader scope of potential knowledge of the FinSA rules of agent and representative) or investors and are exempt from • Help fund managers who wish conduct, that they have no entry if they are to be considered the obligation of checking the to distribute to private clients due to criminal offences against private clients (and require a full status of each investor. UCITS find the best professional assets under the Swiss Penal authorization for public offering). and Hong Kong mutual funds translation service provider; Code and no ban on activity or Fund platforms of major banks have a fast-track approval • Update the funds on profession imposed by FINMA, and large pension funds typically for distribution to private regulatory changes and help that they are properly insured prefer funds authorized by FINMA clients. FINMA has cooperation adapting to them; and that they are affiliated with for public offering. and information exchange an ombudsman’s office. agreements with the supervisory • Help gaining access to big Public offering authorities in 17 countries. Swiss distribution platforms, For more information about the A foreign fund authorised for including the ones from well- register, the website of www. public distribution will gain Setup for public offering in established banks; regiswiss.ch can be consulted. access to big Swiss distribution Switzerland • Help building relations platforms, thus accessing Once a fund manager takes the between funds, Swiss-based Professional or Public Offering a broad scope of potential decision to approach the Swiss distributors and investors; investors. In addition to the market, the first step is generally Professional offering requirement of appointing a to appoint a Swiss representative, • Organise cap intro events and With the updated regulation in Swiss representative and a which will discuss with the fund conferences to connect funds 2020, foreign funds only being paying agent, an authorization manager about aspects which with investors; offered to most Professional from FINMA is required. Due are specific to the type of the 36 AIMA JOURNAL | EDITION 119 37

ESG – POSITIVE CHANGE AND POSSIBLE PITFALLS

Environmental, Social Plan on Sustainable Finance. Barriers to adoption and Governance (ESG), Political agreement has been three words with wide reached on a proposal that Whilst the increased awareness will introduce disclosure of responsible investing and ranging definitions, requirements on asset managers wider ESG factors is a positive interpretations and impact in relation to sustainability. development, there are several in the eyes of investors, Changes to regulations such as issues hampering its widespread regulators, governments AIFMD and UCITS are expected adoption. At the heart of these and investment managers, to be introduced that will issues is the availability of require investment firms to consistent, quality data across has been thrust into the consider sustainability factors in market sectors, strategies and spotlight during the past 18 investment due diligence and to asset classes. This stems from a months, having previously develop engagement strategies lack of breadth and quality of ESG existed in the shadows of that are consistent with the ESG data reported by listed companies bespoke funds and niche needs of their investors. themselves, that in turn acts as the foundation of ESG data investments. In the UK, the Government has analysis used to determine ESG introduced legislation, with effect scores and ratings. Difficulties in The increased visibility of ESG from October 2019, that will obtaining relevant disclosures within the financial sector is due require pension scheme trustees from companies, the “cherry to many reasons and, in part, the to consider, as part of their picking” of ESG data to report and result of influential supporters fiduciary obligations, ESG during the ability to not report, creates a acting as disruptors in otherwise their investment decision making skew in the quality and reliability tried and tested fields of asset and capital allocation processes. of the market data available. management. In a speech by the Furthermore, the Financial Whilst listed equities are highly Bank of England Governor Mark Conduct Authority is currently represented by the largest ESG Carney, titled “A New Horizon”, consulting on proposals that will data providers, inconsistencies the Governor set out the wider require financial services firms and differences are common. In systemic risk that can occur to publicly disclose how they addition, many asset classes such to the financial system due to manage climate financial risk. as private equity, unlisted debt / the climate crisis. Elsewhere credit and distressed assets are prominent investment group Changing demographics not represented within existing BlackRock is now championing ESG data sets. the integration of ESG investing Beyond governmental policy and into the mainstream market regulation, there is a continuing Industry research has shown with the launch of six highly shift in attitudes towards that the current quality of ESG publicized ESG exchange traded investing as the transfer of data may also increase the risk of funds. Both Blackrock and the wealth from the Baby Boomer tracking error within a portfolio, Governor have set a trajectory of generation to Generation X and due to a reduced universe of how they envision ESG will affect Millennials accelerates. Many stocks rated as best in class based the financial world and the need of these younger investors are on ESG scoring methodologies. to be proactive in its adoption to more conscious about the source This in turn may unintentionally ensure success and survival. of investment returns, which in skew the geographic allocation turn is prompting a shift towards of a portfolio’s investments, as Regulatory drivers ESG mandates. Pension funds more developed markets, where Seymour Banks also need to adapt to meet ESG screening and scoring is Head of ESG Services Jurisdictions such as the the investment needs of their more prominent, achieve greater INDOS Financial Limited European Union continue to more “sustainability conscious” visibility and higher scores. [email protected] encourage institutional support beneficiaries. for sustainable investment via the EU Commission’s Action 38 AIMA JOURNAL | EDITION 119 39

The question of segregating to grow. The core barriers to returns generated by either wider integration remain the lack CONTACT US E, S or G factors must also be of a consistent methodology, considered holistically against data quality and the application wider macro and micro economic of a taxonomy for classifying factors such as exchange rates, and implementing ESG factors. interest rates, media exposure Whilst challenges remain, the etc., to ensure performance direction of travel is clear for the attributed to ESG strategies is future of ESG integration and the appropriately identified. investment industry will need to adapt accordingly. In order to help breakdown these barriers and achieve its Action Plan, the European Commission has enlisted a High-Level Expert Group (“HLEG”) to devise a taxonomy to help classify a sustainable investment. However, a taxonomy, whilst potentially solving some issues for industry stakeholders, also presents some challenges.

Greenwashing

At a recent industry conference, experts warned that a taxonomy may result in, or exacerbate “greenwashing”, (the act of falsely promoting a product / service as environmentally friendly, by asset managers and / or issuers) if “green” definitions are classified too vaguely. Bermuda Middle East Sydney Alternatively, barriers to adoption [email protected] [email protected] +61 (0) 412 224 400 of sustainable investments could [email protected] be created if classifications are Brazil New York City too rigid thereby stifling product [email protected] 12 East 49th Street, 11th Floor. Toronto development and hindering wider New York, NY, 10017, USA 500 - 30 Wellington Street West, adoption. Brussels +1 646 397 8411 Box 129, Commerce Court, 38/40 Square de Meeus, 1000 [email protected] Toronto, ON M5L 1E2, Canada Regardless of the direction the Brussels, Belgium +1 416 364 8420 taxonomy takes, greenwashing +32 2 401 61 46 Singapore [email protected] has been noted throughout the [email protected] 1 Wallich Street, #14-01 Guoco industry as a key concern to Tower, Singapore 078881 Tokyo investors looking to identify an Cayman Islands +65 6535 5494 +81 (0) 3 4520 5577 ESG focused fund. However, until [email protected] [email protected] [email protected] such guidance is clearly defined and is applicable across both Hong Kong Shanghai Washington developed and emerging markets, Unit 1302, 13/F, 71-73 Wyndham Suite A10, 28th Floor SWFC, No. 1875 K Street NW, 4th Floor, asset classes and sectors, it is Street, Central, Hong Hong 100 Century Avenue, Pudong, Washington DC 20006, USA likely to continue. +852 2523 0211 Shanghai 200120, China +1 202 919 4940 [email protected] +86 136 1191 9817 [email protected] ESG momentum set to continue [email protected] London (Head Office) The integration of ESG within the 167 Fleet Street, London EC4A 2EA asset management industry is +44 20 7822 8380 here to stay and its materiality for [email protected] the decision making of investors and asset managers will continue 40 AIMA JOURNAL | EDITION 119 41

THANK YOU TO Thank you for reading edition 119 of the AIMA OUR SPONSORS Journal. If you would like to contribute to the next edition, please email Robyn Brooks. Allen & Overy Citco Clifford Chance CME Group Dechert LLP EY Guotai Junan Securities K&L Gates KPMG Macfarlanes Man Group Maples Group PwC RSM Scotiabank Simmons & Simmons SS&C State Street 42 AIMA JOURNAL | EDITION 119