ESG and wealth management: These two phrases are uttered in the same breath more than ever before
However, whilst integrating environmental, social and governance concerns into asset management strategies is becoming ever more standard, ESG is still giving UK wealth managers something of a headache.
Unlike the wider investments industry, where institutional demand is driven by the desire for more sustainable financial outcomes, wealth management is a market where philanthropy, charitable interests and the climate conscience of the next generation present strong demand drivers.
However, against this backdrop, there are a number of complex challenges to implementing a comprehensive and compliant ESG model.
A challenge commonly cited with ESG data in wealth management is the lack of a standardised firm-wide approach to interrogating it. The need for an industry-standard basis to be able to evaluate client portfolios is paramount. Such an industry standard will, at the minimum, protect clients’ interests, ensuring appropriate and consistent consideration through risk profiling and suitability to avoid unnecessary cost or loss.
It is also crucial that data is used in a thoughtful way. It should be an additional input into an investment research process, rather than the ‘answer’ or endpoint, and should be embedded in a manager’s investment and client activities from front to back across everything from brand and proposition through investment process to engagement, voting and client reporting. Unthoughtful application will miss the financial benefits of ESG integration and potentially lead to adverse outcomes.
With a common standard for ESG data analysis established, firms can then build on this if they feel they can differentiate. Leaders in this space have a well-developed proprietary assessment and active ownership structure. It is telling that those wealth managers ahead of the curve are more commonly part of an asset management group or share group ownership with an asset manager, where they can benefit from the greater scale and expertise.
In the near future, regardless of the precise terminology and approach chosen, there will be a growing need to match datasets together: client preferences matched against portfolio holdings, in turn matched against internal and external ESG datasets. Regulation is starting to demand extra disclosure at the portfolio level, particularly on climate measures.
Additionally, there will be the need to collect new datasets, such as client ESG preferences, in a scalable and standardised way, and the infrastructure to support this needs to be designed. We commonly see wealth managers battling 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.
Effectively engaging with clients on their ESG preferences is now key for maintaining a competitive edge. Ensuring ESG messaging is consistent across all content and client engagement – including meetings, marketing materials, and reporting – will help, as will avoiding acronyms and jargon.
Common standards and language across wealth managers will support engagement with clients across the industry. These should act as a baseline, while still allowing room for proprietary development by market leaders.
While the above elements are crucial for implementing an effective ESG proposition, they fail, on their own, to answer the most important question: why should clients trust their wealth manager with ESG? Could clients articulate a firm’s values, actions and why this specific approach will benefit them? ESG considerations provide a clear opportunity to showcase additional value.
Wealth managers therefore need to decide the role of ESG in their firm’s brand and proposition and act on it – whether they simply comply with shifting demand or use this step-change as an opportunity to differentiate.
A strong ESG position will shape how operating models and distribution processes will change to support the wider proposition, which must be progressed in a focused and enterprise-wide programme. We believe that executive level involvement is crucial due to the implications on investment functions.
The majority of wealth managers are pursuing a ‘wait and see’ approach to ESG, either by accident or design. Failure to act quickly presents significant, enterprise-wide risks – to regulatory compliance, investment performance and commercial success. Failure to act as an industry risks having an approach imposed on firms by the regulator, and therefore missing the opportunity to organically develop the approach that best meets client needs.
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 and beyond.