While many fund managers have been shying away from committing their impact funds to Article 9 classification under the SFDR, Eurazeo has bitten the bullet. The firm is raising an Article 9 Transition Infrastructure Fund, a core strategy focused on renewables.
“The most important thing is that Article 9 is a good way to show [that you have] the ambition… of investing for sustainability,” Laurent Chatelin, managing director and head of Eurazeo’s infrastructure fund, said at New Private Markets’ Impact Investor Global Summit last week. The fund launched in April 2022 with a €525 million target and announced a second close at €410 million in March 2023.
Many managers have stalled on committing to Article 9 status because of the more onerous reporting requirements and delays to the finalisation of the EU Taxonomy. But such data challenges did not deter Eurazeo, said Chatelin: “It [requires you] to have a certain discipline when it comes to data gathering. At the beginning the data may not be perfect, but it will improve. It’s a great way to educate and provide data to your investors so they understand what you’re doing and how you’re doing it.”
This data is also critical to ensuring an impact, Chatelin continued: “When we manage those companies, we need to act on something, and the only thing we can act on is data. You need to have data to know where your company is going. And Article 9 gives a great framework for all of that.”
Low Carbon, a fund manager focused on greenfield renewable energy projects in Europe, was also unhesitating about committing to Article 9 for its latest fund. Managing director Andrew Bujtor, joining Chatelin on the panel, said there has been no real unclarity over whether wind and solar developments are classified as “sustainable” in the Taxonomy, so Article 9 “was the obvious classification” for the manager. The reporting requirements have presented challenges such as “educating other people in the team that were a bit scared of it that [the disclosure framework] really isn’t anything new. It’s just looking at [a] new framework”.
The reporting requirements “have been a little bit distracting” and “quite costly”, Bujtor added, due to “implementing everything that you need to implement” and “trying to interpret the regulation”.
More generally, though, Chatelin sees the downgrading of many funds from Article 9 to Article 8 as a sign that the SFDR is effective: “Many [fund managers] realised, ‘What we’re doing is sustainable from a marketing standpoint, but it doesn’t really stand the test.’ It avoids greenwashing. It’s great.”
Grey to green?
The SFDR has been criticised for not recognising the transition of assets: Article 8 requires fund managers to disclose ‘sustainable characteristics’ and Article 9 requires fund managers to invest in fully sustainable assets. For example, an asset manager may seek to reduce the carbon footprint of a coal-powered energy generator or transition it to gas power – but such an asset cannot be placed in an Article 9 fund under the finalised Taxonomy.
Indeed, fund managers such as Tikehau, Allianz Global Investors and Capza have opted for Article 8 classification for transition funds. But Chatelin is confident that Eurazeo’s transition fund will meet Article 9 requirements. For Eurazeo’s particular strategy, which involves equity investments in renewable power generation, “there was no real impact on the investment universe” by opting for Article 9 rather Article 8 classification.
Moreover, Chatelin does not recognise the transition of fossil fuel-powered energy generators as a viable investment or environmental impact strategy. “Last time I checked, when you burn coal, you will create CO2. Either you store the CO2 in the ground – but then the question is how sustainable that is – or you just remove the asset and you build new generation capacity that is fully renewable.”