Alpha has supported a number of Asset Managers and Asset Owners to develop and deploy approaches to Responsible Investment (RI). Due to increasing client demand and upcoming regulatory changes, Alpha engaged a small group of UK Wealth Managers during Q1 2020 to explore how these firms were progressing their Environmental, Social & Governance (ESG) and RI efforts. The findings indicate a wide spread of activity, but with only a small number who could be classified as having made good progress. The general picture presented is one of uncertainty and a need for guidance…
Industry Overview & Challenges:
ESG is giving UK Wealth Managers something of a headache. Philanthropy, charitable interests and the climate conscience of the next generation suggest a strong appetite for ESG and RI products / services (in contrast, the more common driver in the wider investment industry is institutional demand for more sustainable financial outcomes). But interviewees raised a number of complex challenges to implementing a comprehensive and compliant RI model in the Wealth Management industry today. These include
- Data availability: The need for an industry-standard dataset as a starting point to evaluate client portfolios consistently, and support Wealth Managers with suitability assessments, goal-setting requirements and portfolio construction. This is complicated by the common usage of collectives, which are harder to assess than stocks
- Thoughtful application: Once available, data must be used in a thoughtful way – standardised data won’t be enough to enable firms to differentiate. It should be an additional input into an investment research process, rather than the “answer” or endpoint. Poorly considered application will miss the additional benefits of ESG integration (improved performance as well as implicit ESG benefits) and potentially leads to adverse outcomes (poor client or compliance outcomes, particular where re-balancing is concerned)
- Client engagement: Integrating ESG and Responsible Investing into client engagement processes, such as preference gathering, source of funds / background checks and portfolio construction, across the different client groups a Wealth Manager serves
- Manager autonomy: Marrying a scalable, compliant ESG methodology with the common autonomous investment management model
As a result, the industry has not made the same strides as peers across the investment industry in embracing ESG and remains somewhat uncertain about how to proceed – but there is a strong appetite to improve.
Examples of Best Practice
Despite these challenges, some Wealth Managers are making significant strides to improve the service they are offering to their clients. Two characteristics stood out in Alpha’s research – and were common to more advanced firms:
- Investment framework: Leaders have a well-developed proprietary assessment and active ownership framework. These include extensive ESG research and analysis capabilities, high quality proprietary ESG assessment frameworks, and more standardised investment practices across their teams. We observed that these firms are more commonly part of an Asset Management group or share Group Ownership with an Asset Manager
- Client preferences: Leaders also actively engaged their clients on ESG preferences during the suitability and goal setting process; though these are not yet codified in the same way as risk assessments
What Should UK Wealth Managers Do?
Priority 1: Act as an Industry, Learning from Early Movers
Common standards and language across Wealth Managers will support engagement with clients of the industry. These should act as a baseline, while still allowing room for proprietary development by market leaders. Ideally a client using multiple providers should be able to compare their portfolios across providers in a meaningful way. Wealth Managers should also look to collaborate with and learn from other industry participants who may have more advanced ideas on solutions.
Priority 2: Decide the Role of ESG in the Firm’s Brand and Proposition
Define the role of ESG formally (e.g. differentiate vs. comply) and act on it. This will shape how operating models and distribution process will change to support the proposition, which must be progressed in a focused and enterprise-wide programme. This must be an executive level decision due to its implications on investment functions; our view is that full compliance or differentiation will put significant strain on an autonomous investment management model, when investment autonomy is under pressure from both cost and to adhere to increasingly centralised sales / performance and compliance processes.
Priority 3: Prepare Your Data and Technology Architecture
Regardless of the precise terminology and approach chosen, there will be a new need to match datasets together: client preferences matched against portfolio holdings, in turn matched against internal and external ESG datasets. Additionally, there will be a need to collect new datasets, such as client preferences, in a scalable and standardised way, and the infrastructure to support this needs to be designed. We commonly see Wealth Managers already struggling with infrastructure that struggles to support their scale and complexity. We believe Wealth Managers need to start this design process now to be ready for rapidly changing client demand and regulation.
The majority of Wealth Managers are pursuing a “wait and see” approach to ESG and Responsible Investment, either by accident or design. Failure to act quickly presents significant, enterprise-wide risks – to compliance, investment performance and commercial success. Wealth Managers who wait for Regulators and data providers to put forward a solution are already falling behind, and we expect winners (and losers) start to emerge over 2020. Where do you want to sit in this crowd?
To find out more about how you can develop the ESG offering at your firm, contact our specialists using the details below.