How is the industry working towards integrating sustainability considerations? How can this further encourage the availability of ESG products to European investors?
Our position is that although the optionality of having ESG has vanished over the past few years, it remains quite an individual and subjective matter for the moment. Like us, some actors in the asset servicing industry have established ESG reporting tools to include scoring possibilities so clients can screen according to ESG-factors of their own needs and preferences.
The importance and availability of such an offer for European investors can be further encouraged through education and transparency. Given the B2B nature of our industry and in some cases a B2B2C scenario, each actor is in contact with a multitude of asset managers and to some extent their end clients and/or investors. The day you send out transparency rules on portfolios, asset managers will get questions from their clients, boards, pensions funds, and investors.
It’s also important for a certain level of education to take place both from an asset manager perspective as well as an investor perspective. The European Commission has set up an extensive action plan which aims to regulate certain practices but this is not an easy space to navigate and I think asset servicing providers can play a role in assisting both managers and investors in this regard.
What are the latest developments regarding the EC’s intention to integrate sustainability risks and sustainability factors into UCITS, AIFMD, and MIFID? What opportunities could this bring?
What we’re seeing with UCITS and AIFMD is that there will be an incorporation of ESG factors in the investment process and governance for asset managers. Environmental, Social and Governance factors will also have to be incorporated in their risk management framework.
Within MiFID, there will be a multitude of factors to consider now in regards to sustainability. First of all, ESG preferences will be integrated in the investment objectives when considering both suitability and appropriateness. Furthermore, the consideration of ESG factors will now be in the selection process when providing advice, so there will be an impact on client reporting. ESG considerations will also be included in the description on the nature and risk of the financial instrument. Finally, the European MiFID/PRIIPS Template (EMT/EPT) will be updated to integrate ESG classification from now on.
There are opportunities as an asset servicing provider to provide guidance and, in some cases, to provide services to comply in regards to these regulations.
At Pictet Asset Services, we are in the process of setting up a platform to help and guide asset managers and investors when it comes to the various degrees of ESG ambitions and levels of ESG disclosures, setting them up accordingly, understanding the taxonomy, and so forth.
Our vision is to be the asset servicing boutique for active investors. Our size allows us to adapt and be flexible when it comes to approaching an ever changing regulatory environment. This agility allows us to offer innovative solutions to our clients to face the challenges of tomorrow.
Do you think we will see sustainable investing becoming more mainstream over the years?
Yes, we at Pictet Group believe full-heartedly that sustainable investing is not a fad and that it is a long-term trend that is here to stay. We see an increasingly strong demand from asset managers as well as end-clients to get more ESG dimensions added into their oversight and more monitoring from their investment managers. There is an strong interest in ESG related matters, which will only grow stronger with the new generation of clients, who grew up with an understanding of ESG concepts and concerns.
This is a sense of conviction that we have at Pictet ; responsible thinking comes natural to us because we have always adopted a long-term approach to everything we do and had the luxury of time because we are a private company. We’re not taking part in massive amounts of outsourcing on the other side of the world, moving people around to different locations. Furthermore, we triggered an initiative to encourage index providers to ban controversial weapon producers from their mainstream indices.
What are the potential challenges or setbacks when it comes to sustainability in the financial services market?
We see that clients are demanding high levels of “ESG quality”, products with impact and regulators are working hard to build trustworthy ESG standards, as the risk from accusations of greenwashing is real. With these new regulations emerging, the challenge might be to actually restore trust in investors and asset managers.
Another setback, which is often addressed, is the inflation that is happening in the space of ESG products. We are already seeing this to some extent, where these products are witnessing such a high level of demand, that the primary purpose behind it, which is impact and shaping sustainability, is no longer the main driver because of the speculative aspect.
I think that one final challenge to consider is that a lot of emphasis is put on the “E” of ESG. Indeed, green investment is revolutionizing the fund industry, and the on-going climate crisis will keep this trend going. The social aspect of ESG is underrepresented for now, so there is room for improvement in that space, especially with the last year we’ve had.
Looking to the future, will we see a standardised approach when it comes to sustainability investing and how do you think this will work?
Given the regulatory framework set up by the European Commission, there is a clear wish to have a systematic approach in including sustainability in financial products.
I believe that we will see a minimal threshold that will be standardized. Typically, in a MIFID context, there will be no choice when it comes to reporting and we could see a standardized approach to determining ESG preferences in the investment objectives when considering both suitability and appropriateness for investors.