The implementation of ESG regulation across Europe is for sure one of the most complex and urgent subjects that the Fund Management Industry has to cope with. Suisse TechPartners has been working closely with a number of ESG data providers and compliance partners to ensure that customers of our PMplus® system will be completely ready to deliver on their obligations.
ESG regulation does have significant implications for all actors who are part of it. This starts at the stage of fund design and it keeps going with the investment decision process, the investment compliance control and the information reporting to distributors and final investors.
The clock is ticking for all participants to the Fund distribution value chain in order to be ready on time and meet the tight deadlines coming in the next few months. We are indeed entering the last phase of the journey, with a set of variables and factors which could still potentially impact the target operating model for some participants.
Assets Managers are definitively in the lead. They had to deliver in August 2022 their first release of the European ESG reporting file (EET), to comply with the MiFID regulation. The next critical phase will be the delivery of the pre contractual disclosure document by the end of October 2022. Asset Managers will have to specify the ESG objective of the fund and subsequently be ready to manage, track and report according to the defined target.
This means de facto that all their marketing material including their website have to be up to speed and in line with ESG regulation. They need as well to review their investment process to comply with the predefined ESG objectives of the Fund and they have to be ready to report on the actual performance and compliance of the fund including the provision of accurate data in the EET file.
To do so, Asset Managers need to get the adequate raw data, to define a new process to build the investment universe for each fund and make sure that they can track all ESG aspects at portfolio level to report adequately.
As far as Distributors are concerned, the main impact is to review the fund selection process and their MiFID questionnaire to make sure they can identify on one side the actual ESG characteristics of each product, and on the other side the adequacy of a given fund versus the profile of an investor.
Regarding Depositary Banks / Trustee the key functional need will be the capacity to control each transaction independently and to monitor positions against the investment guidelines and objectives defined in the pre disclosure document.
This does sound like a ‘BAU’ task for a Depositary Bank and Asset Managers will have to provide the data necessary to justify the compliance on each investment. It also means that the platforms used by depositary banks will have to be in a position to store these data and to integrate them into their control processes.
Obviously the actors of the Fund Management industry are not all at the same stage of implementation of the ESG regulation due to some initial skepticism on its reality / importance and the lack of means / priority during the Covid crisis, and last but not least the absolute need to build the expertise to face the huge level of complexity.
Nevertheless, according to statistics, there are signs that the demand for ESG labelled products is increasing both from Private and Institutional investors. Many politicians are strongly pushing for it and they are issuing directives at a steady speed.
Finally, Regulators are firmly expecting the Fund industry to be ready and to respect the rules from day one. One approach could be to have no specific ESG strategy for the time being but a recent analysis from ESMA on the relative performance of Funds investing in blue chips is showing that ESG Funds have outperformed non ESG funds with a similar strategy (ESMA publication 50-165-2146 as of 23 May 2022).
As a consequence, all actors will need at a given stage to get organized to adapt and find solutions for the main challenges they face / will face with obviously different degrees of intensity. The only certainty is that the following challenges are going to drive / impact their ESG strategy for the years to come:
- the quantity and quality of data available and the absolute need to collect all information needed to justify investments made by a given portfolio – “not available” will not be accepted,
- the organizational needs at all levels of each company to implement the most seamless processes related to ESG matters and the right controls at all stages of the value chain,
- the reporting and analytical capabilities that are needed to demonstrate the adequacy of the portfolio with the investment guidelines and the MiFID questionnaire and explain the actual ESG performance of the fund,
- “article 8” funds with an exclusion list are very popular and less complex to manage than the “article 9” variant, but even there the devil will be in the details and any wrong interpretation of data at the investee level may have serious consequences for the distributor and /or the Asset Manager.
In order to be on the right track, it seems that a few critical success factors and platforms are emerging to provide options as not all players are going to be in a position to build from scratch an entire ESG factory delivering all functional requirements to be compliant with ESG regulation.
The size of the investment, the time, the expertise required are such that for most actors it is more efficient to look for an off the shelf solution to cover full or part of the requirements and fulfill the critical needs:
- The capacity to have a data repository to store data efficiently, given the huge quantity, including multiple sources with possibly differing interpretations. On that aspect a cloud based solution seems to be critical,
- The capacity to clean / scrub data to support processes like the investment decision and the investment compliance,
- The systematic tracking of the numerous regulatory changes and their implications on current ESG process,
- The capacity to transform guidelines into rules that can be interpreted by systems to perform controls and take necessary action in investment process,
- The capacity to deliver accurate and consistent data to the other actors of the value chain like the auditors, the regulators, the distributors or the data vendors.
ESG is a key element of the platform strategy of SuisseTechPartners’ PMplus® System, as we have constructed our solution on the base of our cloud native software and our already proven investment compliance module.
We would be delighted to further discuss these subject matters with you and see how we could support your company in building your ESG solution.