Large institutional investors are effectively ignoring the categorisation of real estate funds under the EU’s Sustainable Finance Disclosure Regulation (SFDR) because it is not designed well for the asset class.

Two major European insurance companies are not seeking to allocate specifically to Article 8 and Article 9 funds – the two highest categories under SFDR – delegates heard at the INREV Cannes Seminar, held at the MIPIM trade fair this week.

French insurer CNP Assurances and PIMCO Prime Real Estate, which invests in property funds on behalf of insurance group Allianz, both revealed they were assessing the sustainable credentials of funds regardless of SFDR categorisation.

As highlighted recently by European real estate association INREV, EU regulators have recently clarified that funds that seek to retrofit and improve the sustainability of buildings cannot be categorised under Article 9, despite such strategies having the greatest potential for positive environmental impact.

“When we saw that the regulations started to change, we scrapped the idea it would need to be Article 9 under the current circumstances,” said Minna Merilainen, head of real estate investments at CNP Assurances. Instead, the insurer continues to assess the specific objectives of individual funds, “rather than relying on the label”.

Jérôme Berenz, head of indirect investments at PIMCO Prime Real Estate, said the company’s legal team carried out a review of SFDR classifications for real estate and “found it was full of holes”. He said: “In the end, we decided to do what we were doing before.”

When PIMCO Prime Real Estate hires value-add real estate fund managers it wants to understand fully how they will improve the sustainability of the buildings. “We will continue to do that regardless of the classification,” Berenz said.

“It feels like a bit of a missed opportunity that we are creating that layer of work and reporting which in the end is not something that we use.”

There is a growing consensus that real estate funds that seek to improve the sustainability of assets should now report under Article 8, but Jeff Rupp, public affairs director at INREV, warned that it was important that this was widely understood by real estate investors.

“Understanding that Article 8 is actually the fund disclosure category that is appropriate for transition strategies is critically important,” he said. “We don’t want the perception that Article 9 is superior to continue in the market, because that is diverting capital away from the job of getting us to net zero.”

Rupp said the main risk for real estate fund managers is related to reputation. Some funds that disclosed under Article 8 or 9 had to be reclassified following clarification from the European Securities and Markets Authority and fund managers are now cautious of reporting under the wrong categories.

But Aleksandra Njagulj, global head of ESG for real estate at DWS, warned that there could be risks attached to being too conservative in reporting under SFDR. “What we needed to do is to figure out a way to classify correctly – not green wash, of course, but also not ‘green hush’,” she said.

“Saying you are Article 6 in order to be conservative is actually [potentially] avoiding regulation. If you say to your investors you are doing something, then you need to report against it – however flawed the legislation might be.”

SFDR rules are likely to change in the future. The European Commission recently announced that it would undertake a review of SFDR, releasing a consultation in the third quarter and publish proposals in the first half of 2024. “What concerns me is we will get a whole new regulation that is also imperfect,” said Rupp.

Merilainen said investors like CNP Assurance face the challenge of not being able to wait for further clarity and “so we are basically learning while walking”.

Njagulj added: “But if you create a strategy to make sense for the asset class and for your investment portfolio, what the regulation says is secondary – you just comply with the reporting you need to make… it doesn’t matter if it is an Article 8 or Article 9.”

Merilainen warned that if more clarity was not forthcoming there was a danger that for the real estate asset class, SFDR “is going to be like a lame duck”.

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