Harnessing the power of data and ESG

For both responsible investing and leveraging the value of data, investment funds are only beginning to get to grips with the enormous potential. These were central themes of the first day of ALFI’s Global Distribution Conference on 24-25 September 2019.

Becoming data driven

To fully benefit from the wealth of data at their disposal, fund industry players need a clear strategy. They must also work towards cross-industry reforms to boost efficiency and services for end investors. The “Data: distribution intel” panel heard about the need for better understanding of who controls data, how more standardisation is required, and how competitors and regulators must work together for the greater good. There is often substantial resistance to changing legacy processes, but clients as well as service providers must be persuaded to understand the substantial benefits of change. Conference was also told of the need for patience, that the first efforts at using data maybe imperfect as ground-breaking solutions are sought.

Embedding ESG

The “Integration Of Sustainability” panel heard how ESG needs to be fully embedded in all fund production and distribution processes. From the asset manager, to legal, to compliance, to sales and more, everyone must be an ESG expert. Widely accepted standards will help. Conference heard from Sabine Otto of the European Commission that their work on an ESG taxonomy could be completed by year end. There was support for the Commission’s approach of seeking input from across the industry and working to find effective, practical solutions. Even so, explaining ESG investments to clients can be challenging, so this push must be accompanied by investor education.

This later point was emphasised by Hans van Houwelingen of the specialist ESG asset management firm Actiam. He pointed out that although the volume of assets being invested in ESG funds is increasing strongly, not enough of this is targeted at the projects doing the most good. For example, an industrial group with a five year plan to phase out coal use would have clear benefits for the climate, but would fall-foul of many ESG benchmarking exercises. Hans argued that a true ESG stockpicker will get to know a company, its strategy and its management, and aim to make highly impactful long-term investments. “This is the holy grail: an asset class that can’t be commoditised,” he added.

Coping with disruption

Disruption by low cost ETFs is an on-going concern for the asset management industry. The airline industry has already changed in the face of such a challenge. Michael Gloor, a senior sales director with Lufthansa Group told the conference of his industry’s “arrogance” when faced with this threat. “We told ourselves that corporate customers, the backbone of our sales, wouldn’t change to use low cost carriers,” he said. Reality was different, and legacy players were forced to adopt the techniques pioneered by low cost insurgents. An additional on-going challenge is to break the inefficient oligopoly of central reservation system providers that dominate how airlines and travel agencies work together. Michael said this is proving to be a tough task.

New and old distribution challenges

New EU measures to streamline cross-border distribution will help to harmonise rules, but amount to a relatively small step forward. This was the consensus on the “Tomorrow’s Cross-Border Fund Distribution” panel, when discussing up-coming rules designed to harmonise pre-marketing rules. Achieving a more efficient pan-European fund market would require member states to engage with this process, removing administrative and tax barriers in national legislation, said Peter De Proft Honorary Director-General of the European fund trade body EFAMA. He called for a pause in the amount of new regulation from the EU, particularly given the need to iron out complications with the PRIIPs KID before it is introduced for UCITS funds. He also warned of negative consequences if Brexit and trade complications with the US lead to the suspension of the third country passport regime.