Investor protection could be removed from SRI funds

The European Commission proposes funds invested in social businesses be exempt from Ucits.


The suggestion comes in the latest consultation from the European Commission, which purports to allow funds targeting social businesses to be exempt from Ucits rules. The aim is to encourage private investors into supporting such enterprises, which it defines as: “targeting social, ethical or environmental goals as their primary corporate objective.”

Under that definition almost all existing retail ethical or environmental retail portfolios would qualify. However, the Commission goes on to explain these businesses “can be seen” as hybrids lying between traditional for-profit firms and purely philanthropic endeavours.

The ambiguous nature of the definition means existing SRI portfolios could fall under the EU’s suggestion; alternatively providers could alter current funds to accommodate the Commission’s definition. 

Allowing retail funds to skirt Ucits rules would remove many of the investor protections such as diversification and liquidity rules, the IMA warns.

Yet the Commission’s green paper suggests: “The Ucits requirements on diversification, rules on liquidity and rules on eligible assets may limit the effectiveness of Ucits for the promotion of targeted investments in social businesses.

“This consultation therefore aims to explore whether a new bespoke social investment fund framework might be more effective at channeling funds to social businesses, and if so, what measures it might need to contain.”

Under Ucits rules managers are limited to how much exposure they can have to any one company. The removal of such rules could lead higher single-company risk and greater portfolio concentration. Ucits also provides parameters for liquidity and controls the frequency at which redemptions can be made. But the Commission seems to disregard what this may mean in terms of added risk.

It says: “Retail protections raise costs. In this regard, some stakeholders argue investors might willingly exchange levels of exposure to different risks and rewards for greater potential ‘social returns’. This can take the form of taking on higher levels of risk (e.g. lower levels of liquidity, or greater uncertainty over valuations and returns) in exchange for greater levels of achievement of social goals.”

The EU proposals also ask groups to consider whether such funds should be allowed to invest in more than just ‘transferable securities.’ That term covers derivatives, equities and bonds traded on recognisable exchanges and the EU is suggesting social funds could go outside this to invest in things such as micro loans.



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