Russell Group recently attended the Irish Funds Annual Global Funds Conference.

Russell Group recently attended the Irish Funds Annual Global Funds Conference which brought together hundreds of global CEOs, industry executives, policy makers and regulators to discuss the key issues of the funds industry. There was much food for thought, not just for global funds but also for its sister sector, the insurance industry, which is also no slouch when it comes to asset management.

The main items that were of relevance to Russell and its clients related to systemic risk, regulation, lack of quality industry data and ESG exposures, particularly as the conference coincided with the conclusion to COP26. In an early session on regulatory issues as they related to asset management, Gerry Cross from the Central Bank of Ireland explained that the industry is now at an “inflection point” – a phrase that will be familiar to regular insurance conference attendees.

18 months of Volatility

The industry must question the fundamentals of its value and purpose, following COP26 and the last “18 months of volatility, learning lessons from climate change, tail risks, extreme events and COVID-19.” Today should now be a time to “look at your governance, risk frameworks and resilience in the face of operational disruption. We are faced with the question of systemic risk as we learn about our new vulnerabilities.”

The remarks from Jerry Cross were topical as the Irish Central Bank recently issued a “Dear CEO” Letter on Supervisory Expectations – Key Points for Asset Managers. On 3 November 2021, the Central Bank of Ireland (the ‘CBI’) issued a letter to the Chairs and CEOs of regulated financial service providers (“RFSPs”) outlining supervisory expectations relating to climate and sustainability issues.

The letter was issued in the context of the 26th UN Climate Change Conference taking place in Glasgow this month (“COP26”), the CBI’s pledge on climate change action and the CBI’s view that addressing climate change needs to be a strategic priority.

Lack of Clear Ownership of Climate Risks

A key focus for asset managers should be the CBI’s supervisory expectations in respect of disclosures. The letter emphasises that RFSPs must adhere to transparency and disclosure principles and requirements (where applicable) including the Taxonomy Regulation and the Sustainable Finance Disclosures Regulation (“SFDR”), together with other relevant European Supervisory Authority (“ESA”) requirements.

The main areas of focus are as follows:

1. Governance - The CBI states that RFSPs need to demonstrate clear ownership by the Board of climate risks.

2. Risk management framework - RFSPs need to enhance their risk management frameworks to ensure robust climate risk identification, measurement, monitoring and mitigation.

3. Scenario analysis - The CBI considers scenario analysis and stress testing as critical to assessing the impact of potential future climate outcomes, including impacts on capital adequacy, where applicable.

4. Strategy and business model risk – The CBI expects RFSPs to undertake business model analysis to  determine the impacts of climate risks on the RFSP’s overall risk profile, business strategy and sustainability and to inform strategic planning.

Regulator Demands

The CBI plans to establish a Climate Risk and Sustainable Finance Forum of stakeholders to share knowledge and understanding of the implications of climate change for the Irish financial system.

Commenting on the Dear CEO letter, Paul Stillabower, from RBC Investor and Treasurer services said: “The expectation is that firms will have an appropriate governance framework and clear reporting disclosures to both consumers and investors. We're seeing similar demands from regulators everywhere. Can you give us some advice on how this can be implemented in light of the lack of common standards and especially for the independent directors and their risk profile?”

What is your investment philosophy?

Sonali Siriwardena from Morgan Stanley commented: “What we see on the ground is a remarkable difference in the volume of questions that we get on ESG. I ran some stats and our percentage increase for ESG questions on RFPs rose 153%. It is no longer about whether you are a signatory to the PRI (Principles for Responsible Investment), but it should be far more detailed, far more granular in terms of your what is your issue, philosophy, or investment strategy?”

How do funds approach training and expertise? Do they have dedicated resources on ESG? Do they report on Sustainable Development Goals? What is their philosophy in terms of the approaches they use to incorporate ESG integration?

As Siriwardena commented: “Is it about exclusions, is it Thematics, having single objectives, or the Sustainable Finance Disclosure Regulation discussion? It is no longer just about what you do, it is how you hope to provide it and not just at the front end, but throughout the lifecycle of your product.”

Investors Struggle with ESG Layer

Andrew Alabaster, from Blackrock said: “When I'm talking about money market investment, I want products or strategies that work for money market funds, for money market products, first and foremost. That's an important piece. ESG is an increasingly important layer on top of that. What a lot of investors struggle with is how we implement ESG within a portfolio and how that aligns with sustainability goals. It is not easy to square the circle. The sea change is seeing ESG as a financial risk.

“Banks are critical to the energy and sustainability. If we can engage with them and increase the way in which they issue in green space and provide products that help in long term sustainability goals, that's a fundamental way in which we're seeing a sea change. Five years ago, the concept of funded green commercial paper, that is specifically being used by banks to fund green sustainable products didn't exist, but it does now. This is an evolving picture, in some ways and I think a lot of investors and asset managers are struggling with how it is evolving, how we see big gaps in data or seeing ESG as being part of credit score card, the way in which we assess creditworthiness of counterparties.”

No Universal Dataset

“But there is no universal or a well-recognised data set. We have had to develop our own proprietary model to do that, but it is not an easy thing to do. However, that data set, more broadly, is something that is nascent and evolving. It is getting better. It's still very early days. A lot of investors are looking for us to provide evidence, support, and report on how we're doing, what we will be doing, albeit it is very early stages.”

In response to a question from the audience on link to the quality of data, the lack of data, and the lack of standards, Siriwardena concluded:

“It's a challenge. On the data point, it's been quite astounding the tsunami of regulation that's coming our way. But the fact is that the data is just not showing up, certainly for asset owners like ourselves to be able to report. In terms of data availability and accuracy, companies themselves don't have the answers. Also, the reality is that the regulation is hugely equi-decentric. So, for those of us who have multi asset portfolios, fixed income, private assets, it's well-nigh impossible to get the data with the best of intentions.

“Then it comes down to data vendors, like so many people we are in the thick of assessing what kind of data solution we can even run, with the PIs* and the taxonomy environment. We have looked at six data vendors out there and none have a risk engineering data solution that is available currently.”

* Principles for Positive Impact Finance (PI Principles)