FAP converts debt fund from Article 6 to Article 9

FAP Group has successfully converted its FAP Balanced Real Estate Financing I (BREF I) fund from Article 6 to Article 9 under the EU’s Sustainable Finance Disclosure Regulation (SFDR).

The FAP fund has become one of the first Article 9 funds in Germany, with the reclassification taking effect from 1 June 2023.

BREF I is a mezzanine debt fund launched in late 2018. FAP converted the closed-ended vehicle to an evergreen structure in January 2023, with total equity commitments expected to rise from €300m to €400m by the end of the year.

FAP said 65% of BREF I’s existing portfolio is already compliant with Article 9 requirements and that all financing since the start of the year has been allocated according to its new green loan criteria.

Announcing the conversion, FAP stated that investment in and conversion of existing portfolio assets to sustainable status to meet Article 9 classification is far more demanding than doing so for investment in new-build developments, but said this work is vital to meet sustainability goals in the property sector.

What goes up…

The EU has been at the forefront globally of regulating ESG standards for financial markets in an attempt to prevent greenwashing of products and services. The introduction of SFDR standards has been an onerous process for financial institutions however, and the regulations have attracted criticism.

SFDR regulations have been criticised, for example, for not imposing minimum requirements or defining exactly what a sustainable investment is.

Expectations about a tightening of regulations, particularly principal adverse impact indicators and the Do No Significant Harm framework, have seen a trend of some managers downgrading their Article 8 & 9 funds.