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Opinions about the best way forward are always divided during times of rapid change.
The fund management industry as a whole is caught up in a generational shift: the emergence of demands for more environmental, social and governance (ESG) principles in funds. The receptiveness of fund managers to this change, and their desire to continue to serve their clients is revealed entirely by how well they communicate to their clients.
Research by Morgan Stanley found that the latest generation of fund investors are twice as likely to invest in a stock or a fund if social responsibility is part of the value-creation thesis, and data from the Global Sustainable Investment Alliance show that total assets in sustainable investing strategies in five major markets – Europe, United States, Japan, Canada and Australia/New Zealand – increased to US$30.7 trillion at the beginning of 2018 from US$22.9 trillion in 2016.
However, it remains true that ethical investment strategies do not sit at the top of the priority list for all fund providers today. Traditional (and valid) priorities of return, long-term value and strategy retaining their prime position.
This moment of change – a shift in generation both for investors and investment managers - presents an opportunity for the entire industry. Fund administration support providers, such as Hawksford, play an active role in supporting how the industry adapts to this change. We provide the tools, reporting and comprehensive administration to meet these new demands, while allowing clients to stay true to best principles of value creation.
In the past, responsible investment could be simply defined as a process of screening out companies with negative attributes or seeking out companies easily identifiable as having a ‘positive impact’ on society. Companies that involved industries such as alcohol, tobacco and firearms, were easy to spot and cull from portfolios altogether, allowing funds to advertise a ‘clean’ portfolio to clients.
Today, the situation is much more sophisticated.
ESG investing is not simply about screening companies using blunt measures; rather, it is about embedding a broader set of principles, engaging with companies to improve their practices, and conducting ongoing monitoring to ensure that standards are upheld. Achieving the level of candour that the new generation wants requires significant investment into systems and resources that did not exist in the past.
A recent survey by BNP Paribas found that 65% of the asset managers were aligning their investment frameworks with the UN’s social development goals, with key performance indicators a major part of their process. The survey found that the proportion of asset owners that held 25% or more of their investments in ESG funds had risen by 27% since 2017, while for asset managers the increase was 9%.
To a certain extent, the growing popularity of ESG investing is in response to the current economic and market environment. Against an uncertain and increasingly volatile backdrop, asset owners and investment managers alike are not only searching for new growth opportunities, but they are keen to mitigate emerging risks that may threaten future returns.
Overall, investment managers say ESG integration helps them to achieve three things: deliver long-term performance, improve brand image and reputation, and reduce investment risk. The challenge, however, is in determining the degree of impact of each. This is not straightforward.
Unlike more mature areas of analysis, the ESG sector frequently has data gaps, conflicting ratings and limited coverage. In an industry that relies heavily on accurate data sets for measurement and analysis, this is one area that requires significant improvement.
Indeed, the BNP Paribas research referenced above found that 66% of asset managers found data was a barrier in ESG investing. Inconsistencies and lack of coverage aside, the other challenge with ESG-related data is in finding a standardised method for analysing this information, particularly when using multiple sources.
Fund administrators in financial centres such as the Channel Islands have a role to play here, given their expertise in working with complex assets across multiple jurisdictions. As ESG strategies become fully integrated into portfolios, investors require a clear and transparent view of their impact measurement and management strategy. They want to see the impact that each underlying investment is making, and how this can be attributed to ESG credentials.
Based on this, there is a need among investment managers to have effective systems covering reporting, accounting and administration for their global ESG investments. In our view, fund administrators and custodians have a major role to play here. These are the best placed experts to provide investment managers with fresh thinking and solutions around data aggregation, ESG reporting and benchmarking.
As investors face rising demands for responsible investing strategies, they are seeking solutions that help them to identify and monitor performance. Expectations are changing, and investors are increasingly seeking greater transparency over their underlying investments. This demand for greater detail means requiring more, richer and more regular information and reporting on their investments. To support fund managers and their investors, expert fund administrators are equipping themselves to meet the technological demands for clearer reporting – before being dragged to the table.
The broad trend of regulation in fund management continues to evolve towards more transparency and clarity in financial reporting. Those who recognise the coming wave of change would be wise to carefully review the support their administrators offer in order to welcome an emerging client base more tuned into the impacts of environmental, social and governance issues than ever before.
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