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Magazine Issues » July-August 2021

Distribution and governance: “Only one risk is under our control”

DistributionA non-executive director joined a recent Funds Europe webinar to discuss a product governance report produced in partnership with Caceis. Where do asset managers’ priorities lie when crafting product strategies and fund governance post-Covid-19?

The post-Covid-19 landscape in asset management is marred by uncertainty and ambiguities surrounding the global recovery. Within this comes opportunities for change, and as investor appetites shift, mapping the asset management landscape involves looking at the risks the industry faces.

In partnership with Caceis, Funds Europe recently published a product distribution and governance report (‘Strategic choices for asset management in 2021’) to examine the industry outlook. A webinar of fund professionals considered the findings.

Simon Ellis, independent chair, non-executive director and board-level strategy adviser at HSBC Retirement Services, expressed surprise at one of the report’s main findings. The survey on which it was largely based asked respondents about key risks to the industry over the next three years.

“What struck me most of all when we look at the risks in the paper… is that only one of them is under our control,” Ellis said, referring to ‘digital transition’. Other risks, such as recovery, regulatory reform and political uncertainty are all “external factors in the environment that we react to”.

Digital transformation scored 36% (respondents were asked to tick three answers). The post-pandemic economic recovery was seen as the greatest risk, with 52% singling it out. In addition, 39% believed that regulatory reform was the most pressing risk faced by the industry, while 36% identified political uncertainty.

In contrast, only 28% of respondents identified post-pandemic business reorganisation as a key risk.

Regulatory shifts
Elaborating on the subject of risk, Ellis highlighted pressure on firms to provide value for money and transparency. This primarily affects the UK market on the back of the Financial Conduct Authority’s (FCA) Asset Management Market Study, but the theme is gaining traction in Dublin and Luxembourg, with some companies proactively applying the FCA’s remedies from the study to their Irish and Luxembourg-based product ranges. 

The risk of underestimating these regulatory factors requires management, Ellis said – a notion backed by the Investment Association’s (IA) head of policy and research, Jonathan Lipkin. 

Ellis identified the “expectation changes that are taking place”, both in terms of customer delivery and the changing expectations of regulators, as a key area of concern driven by the “extraordinary” evolution of the market, with “totemic changes” in the role of financial services.

One of the key areas of regulatory reform that is already shaping the financial landscape is the rise in importance of environmental, social and governance (ESG) factors. More than two-thirds (69%) of respondents said they had already started the shift towards sustainable finance.

For Jennifer Anderson, co-head of sustainable investment and ESG at Lazard Asset Management, the “materiality of change” on the horizon for asset managers is not fully understood. 

However, the work required by the EU’s Sustainable Finance Disclosure Regulation is forcing managers to consider whether their funds are sustainable or not, she noted. 

More broadly, it is also focusing attention on how firms can evidence their claims and ultimately provide clients with a clear picture of a fund’s sustainable factors.

“We are going to have to get used to being very uncomfortable – we’re only in the foothills of this,” said Ellis, adding that the wider reporting infrastructure is still “immature”.

This extended to the governance of a business, Anderson added, with the robust procedures required for proper reporting still a way off from widespread implementation.

Customer engagement
Digital reporting and communications within the asset management sector, especially with customers, could take lessons from other industries, said Ellis. He voiced concern that if the industry didn’t “get on top” of implementing a future-proofed digital agenda, it risked falling behind.

It would be naïve, Ellis said, to continue with the maxim that only younger people would default to digital means of communicating and working.

Digitalisation is about more than speeding up processes – it is integral to understanding and meeting the needs and wants of customers.

This fed directly into the industry tilt towards ESG, the IA’s Lipkin said, with the emerging area of customisation and the “extent to which the modern investment fund and portfolio can be customised to meet needs – and that will be critically driven by ESG”.

Critically, the industry needs to keep up with the “faster pace” of changing societal needs, something that technology will help facilitate. Asset managers need to address one key concern, Lipkin said, which was to connect with their customers. 

One vital area, the webinar audience heard, is through diversity and making the asset management sector appear more reflective of its customer base, along with the multiplicity of views and ideas that diversity entails.

Net-zero demand
Meeting a disparate range of requests from a customer base is set to become a growing area for asset managers. It is an area that Lazard is grappling with, said Anderson. 

Notably, regulatory and customer demand for net-zero commitments is not only driving trillions of assets under management across the industry to declare net-zero goals, she stated, but also creating differing expectations of what the path to net- zero entails.

While the industry has been making progress in disclosures, data and information around carbon emissions, it is still limited to information around an existing carbon footprint, Anderson added, rather than the “forward-looking trajectory of carbon within a portfolio, and understanding where you can engage with companies to make a real-world impact”.

All of this, she said, has implications for how messages are expressed with investors, as well as the need for drastic investment in data and analytics, with a need to move beyond the “assumption-driven” providers that currently permeate the market.

A key theme underpinning the panellists’ discussion was the huge opportunities available and the agency that asset managers have to propel the industry in the right direction. The uncertainty surrounding the external factors identified in the report clearly showed a degree of wariness, but the influence that the asset management industry can have in cementing positive change is evident – and actions speak louder than words.

The ‘Strategic choices for asset management in 2021’ report by Funds Europe/Caceis is available online.

The ‘Post-Pandemic Landscape in Asset Management’ webinar by Funds Europe/Caceis is also available online.

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