PATRIZIA: Seeking to tweak the EU’s ‘beautiful machine’

This article is sponsored by PATRIZIA

PATRIZIA Infrastructure has over €9.1 billion invested across more than 120 direct infrastructure debt and equity investments and a strong reputation in the sustainability field. Aaron Scott, head of sustainability for the infrastructure business, says the firm’s hands-on approach and embrace of working in a particularly practical and operational way – influenced by and reflected in the number of technicians the firm employs – are key differentiators.

Scott is also passionate on issues around sustainability, and this very much includes the SFDR regulations which have been rolled out by the EU. He admires them as part of the much bigger “beautiful machine” that the EU has created, but he also sees implementation problems that can be corrected.

Does the SFDR need tweaking?

The SFDR regulations have forced everyone to suddenly consider myriad data points and to establish exactly where they are as a business. This has not been as difficult for us, because a data-led approach to sustainability has been central to our way of operating for many years, but it has been a real struggle for many other asset managers.

The SFDR regulations are challenges for people who are not used to dealing with non-financial data and cover subjects that are not what asset managers think about every day. It is such a new way of thinking and the desired outcomes are some way off.

There is a difference in approach between the SFDR and the EU Taxonomy. I would liken those differences to the differences between Napoleonic code law and Anglo-Saxon law. The EU Taxonomy is ‘Napoleonic’ and very clear, but the SFDR allows an awful lot of interpretation in the way ­Anglo-Saxon law does.

There are other unintended consequences. The complex detailed reporting required has created a somewhat unlevel playing field. Consider how some of the smaller boutiques could cope with all this.

It might not be a problem for a pure Article 6 player, but for any boutique that is trying to do more than that, this regime creates considerable challenges. Perversely, SFDR has erected barriers to entry and thus protected the bigger managers.

Where is SFDR most helpful?

There are many benefits, of course, particularly in the area of greenwashing. It has forced asset managers to prove what they are doing year-on-year is indeed what they say they are doing.

SFDR is causing people to be very conscious and to rethink their claims. This has led to a migration of billions of dollars’ worth of funds from an Article 9 to an Article 8 categorisation.

This is all good news, but it is also much more of a challenge for those of us in private markets compared to the listed space. Publicly listed managers can just sell out of ‘dirty stocks’, but we are far more likely to hold an asset over many years and, if we discover a problem with it, it might take many years to sort out the issue. This is, of course, also an opportunity to generate real outcomes as we work through any such asset-level issues.

We are also very dependent on the quality of the data we get from the companies in which we invest. Listed managers can simply download an awful lot of the data they need from their Bloomberg screens. All of this is disruptive.

Will the current consultation help reduce this disruption?

I do hope so. It is very much good news; it is a recognition by the EU that there are many complications arising from what they have done.

Private managers must give our thoughts, and there are ongoing discussions in many of the groups to which I belong. The key message we would want to communicate is the need to make the current state of play less complex and more certain. I would hope that the regulators would generally have a collaborative approach and would recognise that we are in a period of transition.

But the consultation document released in the middle of September has also raised a lot of worrying issues. There is still a need to address the issue of what asset managers should do if they don’t have the correct data.

The consultation document has also added a lot of uncertainty. For example, there is a suggestion that there will be new product labelling regulations, something which would create even more disruption at this stage.

What would you like to see happen now?

I think there are two very important things. Firstly, I would beg the regulators to proceed with caution – please don’t make a sudden right-hand turn in the road. We want stability. Secondly, I would ask that any new versions of the regulations should be introduced more in a spirit of collaboration, very much in the vein of the approach we have seen so far.

I do believe the SFDR regulations will deliver very good things over the longer term. They are all part of a beautiful machine of regulations the EU has created and that includes carbon credits, the CSDR and the EU Taxonomy.

It is all quite elegant from a strategist’s point of view, the stress in the system comes from the adaptation efforts at the operational level. Eventually, it will achieve significant good in line with the green ambitions of the EU, but all part of the grand puzzle must be brought to life and aligned to each other. That still requires tinkering with the machine and hopefully a level head from the regulators as market participants comply.

What about the importance of data more generally?

It is certainly true there is no ESG accountability without data. Proper data collection is a big step for people to understand, let alone make. It is also important to get some harmonisation in the many different definitions which are used for data collection.

There are so many different data sets – from those developed by the GRI, GRESB, SFDR itself and other industry bodies to the myriad ones LPs have themselves developed. They are enormously diverse sometimes with very little overlap. There is a risk of double counting and many companies struggle to provide all of the data that is necessary.

The EU has sought to introduce a standardised data template but what they have suggested so far has been rather a soft launch. That is not much good in driving people towards a unified approach.

What is needed is more akin to what we see in the approach to tax and financial reporting; there needs to be a serious professionalisation. It is very noticeable that if you look at the big four audit firms, they are throwing a lot of systems and a lot of their people into looking at sustainability. We need to have a similar approach adopted by asset managers.

Will you get your wish list?

I am an optimist; you have to be when you are in change management, which sustainability really is. I think a lot of my wish list will come to pass and that we will get to a good place.

Sustainability has advanced hugely and is becoming embedded in the financial system. There are a lot of good people in the sustainability world now who interact across businesses at multiple touch points and are leading change across the value chain.

That is not to say that there aren’t excesses in the enthusiasm for sustainability right now. Too many people are kidnapping the topic for ends other than the pre-eminent one of energy transition. But my optimistic suspicion is that will not last, it is just a phase.

While it is true that a lot of the efforts the EU is currently making on sustainability are shooting us in the foot, I would again emphasise they are all part of a much bigger scheme that is moving in the right direction. I believe these measures will take the allocation of capital to the next stage and allow us to back high-intensity green energy technologies that will achieve the energy transition that is necessary.

It is all a beautiful machine. It just needs a few tweaks to bring the logic to life.

Do you fear Scope 3 emissions compliance will further add to problems?

No, actually I am not worried about that issue. We are practical operational managers. Successful Scope 3 reporting just depends on where exactly you draw the ‘perimeter’ in your calculations.

We are committed to reducing our overall emissions, but we enter into a sensible discussion with our investments as to where exactly the perimeter should be drawn in a practical way. What are the actual emissions that are being made and what can be done to reduce them in a sensible manner? Part of that perimeter discussion is also the where can our investments reasonably affect change.

Timeframes are always an issue, here. The temptation for too many managers is to look only at the next two to three years when, really, we need to look at five, seven or even 10 or more years.