Two years ago, the European Commission (EC) implemented its Sustainable Finance Disclosure Regulation (SFDR), a framework that provides a level of standardisation for investment funds with regards to the environmental, social and governance claims made by these funds domiciled in the bloc.
The ‘dark green’ funds – ‘Article 9’ funds – are funds that deliberately have some type of sustainability as their objective and meet certain criteria. Article 8 funds are those which don’t necessarily have ESG factors as the core objective of the fund, but at the very least, they ‘do no harm’. Many large institutional investors in Europe have ESG mandates of some kind, making the Article 9 tag a competitive advantage for investment funds that meet the criteria, certainly when it comes to environmental concerns, which is where the vast majority of the EC’s efforts have focused thus far.
Life settlement funds can’t be Article 9 funds, but that’s because the EC hasn’t laid out the rules for the social-based leg of the ESG stool – it’s only the environment pillar that has had criteria decided to date. But they do meet the criteria to market themselves as Article 8-compliant funds, for two main reasons. The first is the cash benefit provided to the policyowner at the point of sale at multiple times the surrender value of the policy; the proceeds from which can be used to fund anything ranging from medical bills to paying off a mortgage (there are no restrictions). This is seen by the industry as a benefit to thousands of American consumers each year and is something that the industry itself promotes consistently.
The second is that life insurance companies are considered to be strong ESG-friendly counterparties. The environmental footprint of these firms is much smaller than many others, and the concept of life insurance is that it’s helping people, which is a societal positive, so the ESG ratings agencies look more favourably on life carriers versus their property and casualty cousins, which may be insuring a coal mine, or a tobacco factory, for example.
Still, Article 8 is not Article 9. But EU lawmakers will define the requirements for funds with a focus on the social eventually, which could go some way to determining whether life settlements could qualify for Article 9 status. The challenge for the life settlement space, however, is whether it gets a seat at the table during those discussions.
“If the regulator would accept an overall argument that we are providing capital to individuals that is higher than the surrender value which therefore creates a positive social impact – that could be accepted by the regulator as enough to qualify for Article 9,” said Rainer Gruenig, CEO at Zurich-based Plenum Investments Ltd. “But the life settlement market is smaller than many others. Therefore, we don’t have as much influence in Brussels as the traditional asset classes. We’ll have to wait to see if there is anything specific that the life settlement industry can align with to justify Article 9.”
If life settlements don’t make the cut, does it matter? Will that impact asset flows into the space negatively? Gruenig says that Article 8 is currently sufficient for the vast majority of investors. For now ESG tends not to be the starting point for initial conversations with potential clients.
“The conversations we have currently start with the risk-return profile, they don’t start with ESG,” he says. There’s a lot to explain about life settlements before we get anywhere near ESG, but when we do, then the social benefit of the space is always a pleasant surprise for those who are less familiar with life settlements.”
The European life settlement market will have to wait to find out whether these funds can be ‘re-branded’ as Article 9 or not. For Gruenig, it’s a no-brainer, but whilst he doesn’t think it’ll impact asset flows, the bigger picture would be a tailwind to the space.
“I personally believe that EU domiciled life settlement funds should be Article 9. Our industry creates a positive impact for policyowners by realising a higher cash value for their policy, and their spending creates and sustains jobs. Life Settlements thus make a small but effective contribution to solving the problems surrounding old-age poverty and the financial effects of rising life expectancies including but not limited to helping seniors to pay for their health care costs. We’re a positive business,” he said. “But while I don’t think that it would make a significant difference to allocations from investors in the short term, Article 9 compliance would at least provide us with the opportunity to be involved in the impact conversation, which is important strategically for our market.”