Are asset managers ready for the new challenges?

Regulations, Wave Net Zero, Clean Mobility, Privacy, Technological Progress, Big Data AI, Platform Economy, Cloud and E-Commerce, Sustainability, Climate Change, Sustainable Resources, ESG, Social Changes, Diversity, Inclusion, Citizens, Long-Term Trends …etc.

 And among all these words, a keyword “transparency”; and a key element “regulation”. 

I do not intend to go into too much regulatory detail, a lot has already been and continues to be written about ESG, with high-quality technical information, but I do try to ask some questions-answers that help us highlight the impact of what the European Green Deal, presented by the European Commission, represent for the financial sector, that is, the impact of implementing a growth strategy for Europe with the aim of making Europe the first climate-neutral continent in 2050. This means, among other things, that investments must be redirected towards long-term investments towards more sustainable technologies and businesses. 

Even if 2050 seems far away to us, the EU agreements on the first deadlines to be met are very close, this includes the deadlines to be met in the EU Sustainable Finance Plan, an ambitious plan with a considerable impact on the financial sector, so based on common definitions (taxonomy) of what sustainable activities are, the plan aims to anchor beliefs and actions in both, the financial sector, and among investors.

So, let’s go to some of the questions:

What are the general regulatory requirements for sustainable finance?

Regarding MiFID II ESG and IDD

  • Integration of Sustainability Risks in Policies and procedures.
  • Consideration of sustainability preferences: selection process, investment advice, determination of conflicts of interest.
  • Inclusion of sustainability factors in the description of the selection process of financial products offered in the investment advice process.
  • Integration of sustainability factors in the product’s governance obligation.
  • Identification of the potential target market for which the financial instruments are compatible based on the clients’ sustainability preferences.
  • Consistency with the target market.
  • Transparency of the sustainability factors of financial instruments.

Regarding SFDR (Sustainable Finance Disclosures Regulation) 

  • Product classification: Article 6, Article 8, Article 9: Sustainability Risk Policy, PASI Declaration (Comply or Explain) Integration of Sustainability Risks in the Remuneration Policy

Regarding the EU taxonomy

  • Product without EU taxonomy alignment, disclosures in pre-contractual and periodic reports:
  • For products that invest in investments aligned with the EU taxonomy, as of January 1, 2022:
    • Information on the environmental objectives and description of how and to what extent the investments qualify as EU Taxonomy aligned.
    • Breakdown of the proportion of EU Taxonomy aligned activities by enabling and transitional activities
    • Application of statement (Art. 6), “The do no significant harm” principle applies only to those investments underlying the financial product that take into account the EU criteria for environmetally sustainable economic activities. 
  • For products which invest into EU Taxonomy aligned investments, as of 1st January, 2023:
    • Specific requirements embedded into the RTS templates. 
What does sustainability preferences mean?

Taxonomy Alignment, a financial instrument for which the client or potential client determines that a minimum proportion should be invested in environmentally sustainable investments (minimum taxonomy compliance).

What does the EU sustainable financing plan include and the impact on Asset Managers?

Investment firms should, consider the sustainability risks associated with their investments and disclose how they are integrated into investment decisions that have at least some environmental or social characteristics.

The plan includes:

  • Common definitions (taxonomy regulation).
  • Transparency.
  • Consideration of Sustainability risk.
  • Strengthen the participation of investors.
  • Standards and benchmarks.
Who are the main stakeholders, who have been driving the growth of ESG investing?
  • Companies, Awareness of ESG-related risk in competitive advantage, Lower cost of capital if ESG-aligned and more purpose-driven. 
  • Government, Greater recognition of the need for standardization of definitions/processes, focus on climate commitments, post-COVID focus on social inequalities.
  • Managers, increased availability and transparency of ESG data, more customer-centric delivery, more purpose-driven.
  • Investors, generational change in values, perceived performance benefits, increased ability to assess authentic ESG integration.
  • Community, Increased scrutiny on capitalism, post-COVID paradigm, Growing vocal engagement with business.
  • European regulators drive global regulatory pace, regulation engages stakeholders to create collective action. 
What are the challenges facing Asset Managers and Financial Institutions in adapting?
  • Take a responsible investment approach.
  • Adopt international standards.
  • Apply to labels.
  • Adapt the governance model.
  • Monitor non-financial KPIs.
What is the key to the Asset Manager?

It is key for asset managers to have access to a reliable ESG database, so they can integrate this ESG data, indices, sustainability risks and opportunities, historical portfolio data, issuer-level analysis, and analysis into their existing investment processes.

Integrated ESG indices (broad and thematic markets) designed to align ESG and investment objectives, while ensuring low tracking error vs. comparable “standard” index.

What is one of the main contributions in this whole process of some key players such as the Asset Manager?

The Asset Managers are committed to incorporating ESG factors into their strategy and to implement the UN 2030 agenda for sustainable development. UHNWIs and managers are increasingly involved in achieving by 2025, and It is considered that at least a third of portfolios to be invested in environment. 

For this reason is necessary a critical contribution of the Asset Manager of the information of the data, the transparency of the data and the alignment of the taxonomy to contribute to the success of this strategy.

We will continue reading and learning with these and many other questions, but I hope that at least these brief ones have made us think about the impact that this growth strategy represents, and that it is not only the responsibility of the main stakeholders, as if we were not part of them,  but of all of us as individuals, and of course of all that play a relevant role in the financial sector such as custodians, private bankers, asset managers, insurance companies, who incorporate an ESG policy into their business strategies.

And now yes, last and not least, like last year around this time, I take the opportunity to wish you all a happy summer holidays!

Sources: Quintet, UN, WHO, Knowledge4policy, IPCC, BNEF, CB Insights, Cybersecurity Ventures, Statista, McKinsey EFA, Deloitte. 


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