The Responsible Investing product landscape is changing and firms should ensure they are well-prepared to tackle the challenges that this will bring. Alpha’s recently conducted 2020 Product Trends Survey revealed four key facets of change within Responsible Investing; specialist products are not the most important point of focus, integration across the fund range can no longer be avoided, fee pressure is expected to hit soon, and the response to regulation requires a step change. Each of these facets of change requires imminent action by asset managers…
1. Demand for specialist Responsible Investing products continues to grow and so specialist funds are likely to have good AUM growth rates.
However, these fund ranges are unlikely to grow large enough to constitute a significant portion of overall AUM. Having a specialist product range may be necessary, but alone, it will certainly not make for a sufficient Responsible Investing proposition in 2020. It is therefore worth considering how much resource should be allocated to them, versus improving ESG integration across your main fund range.
2. Demand for ESG integration has seen even more growth than specialist products over the last 12 months.
Alpha’s 2020 Product Trends Survey showed that more asset managers are seeing “substantial” demand for ESG integration across the fund range, than for specialist Responsible Investing products. A shift in attitude from “why” to “why not” among investors, consultants and the media means asset managers should be prepared to answer why they have not integrated ESG factors thoroughly across their fund range. Increasing consensus, particularly in a mid-COVID-19 world, that ESG integration can foster improved risk-adjusted returns, will mean that this expectation will only grow.
3. Responsible Investing Products will soon be hit by the fee pressure seen across other parts of the industry.
Demand for specialist products is strong and 24% of respondents believe that a premium can currently be charged to provide these products, most citing the need for specialist resources as the reason for charging higher fees. However, none of these respondents felt that this would be the case in 3 years’ time.
4. Fund disclosure requirements are hitting asset managers sooner than expected.
With the ESA’s consultation on ESG disclosures underway, as well as the incoming EU Disclosure Regulation and Taxonomy, it is clear that regulators are becoming increasingly demanding when it comes to disclosure. Despite this, Alpha’s research shows that, while the overwhelming majority (88%) of firms expect ESG scoring to become a mandatory part of fund selections within the next 1-3 years, on the whole, asset managers’ expectations of the pace of regulatory change are not aligned to the regulatory reality. For example, some understand that they should be prepared to disclose carbon footprinting and climate scenario analysis in the near term, but several are not expecting to need to make these disclosures for 3 or 5 years and 13% believe they will never have to disclose carbon footprint or impact.
Addressing the ever-changing landscape
These trends will need to be addressed in the near term. Asset managers should recognise that, while having a range of specialist products is necessary, it is not sufficient. Firms should evaluate how far-reaching and thorough their ESG integration is – “Is it cross-asset class?”, “Can more be done to engage with investee firms?”
Charging a premium for some specialist products may be feasible today, and may be necessary to reflect increased investment by the asset manager to strengthen its ESG capabilities. However, firms should proactively consider how they can ensure that these product offerings remain profitable in the near term, when fees may need to be reduced in line with industry averages.
Asset managers should also be careful not to be caught unaware when client and regulatory demands land (as many have been, with the ESA’s recent announcement on ESG disclosure) and so should begin to prepare for increased disclosure now. Access to, and integration of data into investment and reporting processes are likely to be the primary challenge firms will face in providing these disclosures (see Alpha’s previous ESG data trends article). While these challenges are not insurmountable, firms should ensure they are making a step change on this journey, to enable them to ride the wave of incoming regulatory change.
How Alpha can help
Alpha has extensive experience in designing optimal target operating models and technical solutions across the value chain of asset and wealth managers. In recent years we have supported some of the most strategically important product initiatives for our clients, helping them improve their ways of working and successfully deliver complex changes to their product range. From centralised Product Book of Records to automating launch processes, we have helped asset managers realise greater efficiencies in their ways of doing things, allowing product personnel to add greater value and strategic insight to Asset Manager decision making.
If you would like to find out more about how asset managers will need to respond to these challenges, please get in touch.
For more information on the topics discussed please follow the links below to find out about Alpha’s recently conducted 2020 Product Trends Survey and to read some additional thought leadership articles on Product and ESG within the Alpha Outlook 2020.
About the Authors
Vanessa Bingle
Senior Manager
Vanessa heads Alpha's ESG & Responsible Investing proposition. Since joining Alpha in 2018, Vanessa has led a variety of investment-focused projects with asset managers and asset owners, including helping to design and embed an organisation's ESG vision across investment- and client-facing activities, post-merger integration of investment teams, and designing investment research collaboration approaches. Before joining Alpha Vanessa worked for six years as an Investment Consultant
Sonia Nath
Consultant
Sonia is a Consultant at Alpha and conducted the analysis behind Alpha’s ‘Product Trends in 2020’ research, evaluating the data to identify key trends emerging in the industry. Sonia is part of both Alpha’s Product and ESG proposition teams. She has been a consultant for 3+ years and has worked with a number of global asset managers to deliver projects across several practices, including ESG, Distribution and Compliance.