First Article-9 Funds Demonstrate How Impact Investing Works

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02. Dec 2022

For roughly one year now, initial impact funds under German law — meaning investment funds that meet the strict sustainability requirements of Article 9 of the Sustainable Finance Disclosure Regulation (OffV)—have been launched. For the time being, funds of this type are reserved for institutional investors, and remain unavailable to private investor yet. Launching impact funds involves a considerable effort: Fund properties that are supposed to achieve environmental impact objectives have to undergo extensive measures. These include, without being limited to, the generation of energy on site, energy storage, energy optimisation and carbon avoidance. Some funds have chosen a strategy of buying standing properties and upgrading them along ESG lines. Here is why: New-build construction is resource-intensive, whereas standing properties already tie up a lot of CO2. Equally important is the recycling of building materials. This makes it easier for a given fund to achieve its social impact targets. The recent interest rate reversal makes the environment for impact funds more difficult, because many investors have adopted a wait-and-see stance. But in the medium term, the relevance of this format will grow significantly. Current energy prices alone will promote it further. It is also safe to assume that the regulatory parameters will keep tightening. Initial amendments entered into force on 1 January 2023.

These are the main takeaways from today’s online press conference on the subject of “Impact-Investing: What Is the Business Reality of Article 9 Property Funds?” which was attended by Hannah Dellemann, Team Head ESG at INTREAL, Christean Schmidt, Head of Sustainability at PALMIRA CAPITAL PARTNERS, Ralph Andermann, Managing
Director of WEALTHCORE, and Prof. Dr. Robert Göötz, Managing Director of Real Blue KVG.

Hannah Dellemann started by elaborating the regulatory framework of Article-9 funds. In doing so, she focused specifically on the changes that will enter into force on 1 January 2023. “So far, the Taxonomy covers only two of six environmental objectives, namely climate change mitigation and climate change adaptation. At the start of next year, another four objectives will be added, although the technical criteria to be met have yet to be published in their final version. The scope of transparent disclosures required in the future will also expand within the framework of the Sustainable Finance Disclosure Regulation – and include annual reports, websites and pre-contractual information,” said Dellemann. A proven ESG expert, she moved on to provide a market overview: “Impact funds are still few and far between. We have identified seven open-ended institutional property funds under German law. Four of these invest in residential real estate.” Among Germany’s open-ended public property funds, there is not a single impact fund yet. “Just when the first Article-9 fund for private investors will hit the market depends essentially on how quickly supervisory authorities and market players come to an understanding of impact investing as a unified format. How big a challenge it is to measure the impact of a property investment on the environmental objective is illustrated by the current reticence among fund providers in the context of launching impact funds. The situation has been compounded lately by the interest rate reversal and the current jitters on the real estate markets,” said Dellemann.

PALMIRA Focuses on Standing Properties, CO2 Reduction and Carbon-Neutral Management

Next, Christean Schmidt presented PALMIRA’s logistics impact fund: “New-build construction consumes far too many resources and has a poor carbon footprint. Our fund strategy seeks to acquire existing logistics properties, to lower their energy demand by 30 percent, and then to operate them in a carbon-neutral manner.”

In practice, this means that the energy is generated at the property itself, for instance via photovoltaics or solar-air collectors, and subsequently stored – for instance, via a redox-flow battery electricity storage or ice storage. This is complemented by energetic optimisation and consistent CO2 avoidance. Schmidt went on to say: “All the energy consumed in or at the property is offset against the energy produced on site using CO2 output as control variable. At the bottom line, the system should return a zero sum.” Palmira has earmarked 500 million euros to invest in the fund. The net cash-on-cash return for institutional investors will be 4.0 percent annually.

WEALTHCORE Prepares Fund for Future Regulatory Changes

Ralph Andermann used the example of the Wealthcore Green Impact Fund to discuss the topic of residential real estate: “We designed the fund on the basis of the Taxonomy Regulation’s criteria. On top of these, we developed some criteria of our own, firstly because we wanted to have a safety buffer against further regulatory changes, and secondly because we simply set a higher standard for ourselves.”

He moved on to detail the criteria, illustrating them with the example of a property of 153 residential units in Vienna. “The property’s primary energy demand undercuts that of a nearly-zero-energy building by another 50 percent. Moreover, the property has ways to adjust to future climate changes. To this end, a thermal building simulation was conducted based on the climate data anticipated by 2050, which the property completed with an excellent score. Another important criterion is the recycling of the materials tied up in the property. In the case of the asset in Vienna, 80 percent of the building materials are
recyclable,” as Andermann elaborated.

Preserving the Impact Status of the Social Criteria is Easy

In closing, Prof. Dr. Robert Göötz gave a talk on the question how impact investing works in care home real estate. “In the case of care-home and healthcare real estate, it is comparatively easy to achieve a great impact status because every asset your pick will enhance social sustainability. For example, if a given rural district has a shortage in long-term care home places, fund properties located there will help to reduce the short cover. Our recommendation is to limit the focus of investment funds to a single impact objective—such as social objectives in the case of care home real estate—rather than pursuing several impact objectives at once, because doing so could create a conflict of objectives.”

This is not to suggest, however, that no environmental objectives are pursued with care home real estate. “You should define secondary environmental objectives that don’t necessarily have to result in an environmental impact. An example for a secondary objective would be that a property should at no point violate the climate path of the Intergovernmental Panel on Climate Change (IPCC),” as Prof. Göötz explained.

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