Complying with EU SFDR costs money. At the lightest-touch end of the spectrum it requires at least some internal legal or operational expertise to be combined with outsourced capabilities.

At the heavier end of the spectrum, you need boots on the ground. “If you have a European fund investing, for example, in solar projects in the Philippines, they would ideally have people in the jurisdiction who can advise them and monitor investments on the ground,” says Shantanu Naravane, a partner at Herbert Smith Freehills.

There is currently a live discussion around who should pay these additional costs; should they be be absorbed into the GPs’ management fee or should they be footed by the fund itself (ie, the LPs)?

It is instructive, says Naravane, to look at practice around AIFMD – a regulatory framework in place in the EU since 2011. Any “entity-level” compliance obligations under that framework are covered by the GP, while fund-related costs are passed on to investors in the fund. “There’s obviously some degree of variation in market practice, but we definitley see this as being fairly common,” he says.

The argument for fund-related SFDR costs to be charged to investors is “fairly strong”, he says. “LPs coming into the fund should recognise that this is the cost of investing in this way… A lot of the additional cost is to ensure that, when the fund sais it’s Article 9, it actually does end up making sustainable investments.”

What about instances where an investor-base contains both EU and non-EU investors? Should non-EU investors be exempted compliance costs? This is not a scenario Naravane has seen played out, and it is difficult to see it happening with SFDR. For one thing, there may be overlap between the work done for EU SFDR and work done to align with other regulatory or voluntary ESG frameworks. For another, all investors in the fund benefit from the work done, whether they are EU-based or not; it would be a “tough argument” to make that the costs should be covered by EU LPs alone, says the lawyer.

Everything points to investors picking up the bill for EU SFDR compliance. If they benefit from it, then so be it.

Another consideration is whether the additional compliance cost linked to raising capital from EU investors causes some non-EU GPs to steer clear of the bloc when fundraising. Naravane refers to one UK-based client that has given serious consideration to containing its marketing effort to the UK and Asia for that reason.

This seems unlikely to turn into a widespread trend, however, and indeed the same client has decided to market into the EU after all. As the rest of the world catches up with the EU on sustainable finance regulation, the benefits of avoiding the EU SFDR will diminish. And amid a tougher fundraising environment, European capital becomes harder to forgo.