The inaugural meeting of The Senior Leaders ESG Forum hosted last month by Objectway, a specialist in digital Wealth & Asset Management software, and chaired by the benchmarking and research firm Compeer, brought together a group of leading Wealth Management firms to discuss the opportunities and challenges associated with ESG investing.

The forum discussion centred on the state of ESG readiness in Wealth Management, as well as the key business objectives to consider when forming an ESG strategy, the evolution of client expectations around ESG, and how the ESG regulatory journey will look like.

A competitive differentiator for wealth managers

2020 was a game-changer for ESG. Compeer research on the theme showed that 80 per cent of clients requested some access to ESG compliant investments in their portfolio, while this figure rose to 94 per cent for under 40s.

Wealth Managers, indeed, have to consider ESG investing as a commercial opportunity. But to capitalise on it, significant commitment from the top management is required to embed the ESG strategy within the company and support it with the appropriate technology.

The survey report “Are you ready for ESG?” published earlier this year by Objectway, reported that although Wealth firms expect some of the greatest areas of change to be around suitability, only a minority (39 per cent) have already implemented a specific ESG policy. The majority of the interviewees are not ready. With 22 per cent lacking a policy and 39 per cent developing it.

Although integrating ESG into a risk management framework across the client lifecycle is a challenge for investment firms, an integrated ESG-ready solution will increase client engagement and the delivery of operational efficiency. Indeed, nowadays clients want a rich digital investment experience and expect to be able to see tailored ESG reports on the go, with information such as individual ESG scores as well as their carbon footprint and what impact their portfolio has had on the environment.

ESG is consequently a real differentiator between firms. In this scenario, wealth mangers adopting ESG integration will have a competitive advantage.

The matter is no longer whether or not to take into account sustainability criteria in the investment process, but rather how to do it consistently and accurately.

Total portfolio approach discriminates leaders from laggards

This key challenge emerged both in Objectway’s survey and during the Senior Leaders Forum.

Some firms have adopted manual workarounds to capture ESG preferences for clients, managing the risks and rebalancing portfolios, but ideally they have to  look for a digital solution to integrate with their current set up.

When asked if the investment process was supported by a fully integrated platform, only 7 per cent of the surveyed opinion leaders answered positively, while a remarkable 87 per cent of them declared they do not have a vertically integrated risk management solution.

Alberto Cuccu, Objectway UK CEO, commented that in such a context it is therefore essential for wealth managers to rely their investment decisions on processes that take into account the risk propensity and characteristics of the end-client, respecting the sustainability criteria. To better handle the sustainability matter, it is necessary to establish proper management guidelines of ESG components within an investment process.

The entire investment process must be based on an approach that considers the portfolio holistically. Therefore, the decisions relating to its construction, optimisation and implementation must be taken by giving due attention to the effects generated by the various sources of risk, both systematic and specific, and including sources related to sustainability aspects.

Such a process requires an end-to-end ESG & risk aware investment system . A solution where the ex-ante analysis of risk and sustainability are tested and validated by ex-post monitoring, resulting in stronger returns and higher quality of investments, relied on processes that take into account risk tolerance and the characteristics of the end customer, complying with the sustainability criteria.

An overarching need for common standards and data quality

While client demand is bringing attention to ESG (6 out of 10 firms affirmed that clients demand is the main motivation for them to integrate ESG into their investment process), ultimately, regulation will drive and shape their ESG offering.
All eyes are on the FCA to see whether they will follow in the footsteps of the EU or carve a different regulatory path. Recent changes to MiFID II and SFDR have not made it clear what is expected from wealth managers and advisers in the UK.

Lastly, the implementation of reliable, traceable and robust data is essential to establish the proper management of ESG components within an investment process. This requires elaboration through a data quality system . Data providers have had their own ESG methods and frameworks in place for several years and the quality of the scores is increasing. However, due to the lack of global standards from regulators, the ESG landscape for data providers is fragmented with every provider using their own methods.

Different industries face different levels of ESG risk, and therefore divergence can be very significant. In addition, the level of granularity on ESG varies per provider.

Due to the above factors, a careful selection process of the data providers is advised.

It can also be tricky to standardise ESG metrics across all high or low risk services, and even harder to explain this to clients. When looking to display data in a positive light, the risk of greenwashing is always present.

Getting to grips with the data is a fundamental step. Finding a way to decompose the information into a readable format will ensure it does not loose its value and clients can see the impact of their portfolio.

The research paper collecting all the insights emerged during the inaugural Senior Leaders ESG Forum and the full survey report “Are you ready for ESG?” released by Objectway are both available for download here.