The crux of regulation – and how to seize opportunities

If you talk to asset managers these days, the topic of sustainability is on everyone’s lips. However, it is less about new business prospects and more about difficulties with regulation. Because, as is so often the case, well-intentioned is not the same as well-done. With the entry into force of the Disclosure Regulation (SFDR), asset managers are also obliged to classify their investment strategies as Article 6, 8 or 9 according to their sustainable orientation. Since the beginning of the year, the templates of the Regulatory Technical Standard (RTS) must also be used.

“I have no feeling where the journey is going”, “If only I knew what to do”, “I’d like to behave correctly, but how?” – these are some voices from the market that capture the situation in which asset managers currently find themselves when they turn to the topic of sustainability. And even large investment houses have often downgraded their products, originally intended as Article 9 funds, to Article 8 or Article 6 standards for fear of “spruced up” sustainability attributes in company reports and growing confusion around the EU’s anti-greenwashing rules.

Yet sustainable investments also make a lot of sense from the client’s point of view: according to PwC, 82% of asset managers want to offer sustainable investments in order to meet their clients’ requirements. Since August 2022, asset managers have to ask their clients’ sustainability preferences and implement them in all transactions.

Regulation also affects asset managers

While there have always been numerous regulatory requirements in investment advice, asset management or financial portfolio management has so far been less affected by deep cuts. The reason is probably that the portfolio- and strategy-related view of asset management is difficult to capture in rules. This difficulty is now also apparent in the attempt to implement sustainability requirements in asset management.

Here, the past has already shown that communication is everything: If the client’s wishes do not fit the asset manager’s offered sustainability concept, the legislator has allowed a subsequent adjustment. The client can thus adapt his preferences to the asset manager’s concept.

What sounds rather cumbersome can also become so in practice.

This can either be done online as part of the digital onboarding process or by investors and asset managers going through the questions together on a tablet, for example.

The German-Luxembourg fintech, which works with asset managers as well as savings banks, private banks and major banks, generally relies on platform solutions for digitalisation projects. This keeps the effort for the individual asset manager as low as possible and ensures a short project duration and implementation period. “Our white-label platform solutions enable maximum adaptability to the needs of the asset manager. We know how important it is that the client has an end-to-end brand and user experience, that they perceive the identity of the provider throughout the process,” says Brock.

“Our white-label platform solutions allow for maximum customisability to the needs of the wealth manager. We know how important it is that the client has an end-to-end brand and user experience, that they perceive the identity of the provider throughout the process.”

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Sustainability reports keep asset managers on their toes

A second important building block in sustainability regulation is ongoing reporting to clients. The implementation of the technical and regulatory requirements regarding communication have kept asset managers on their toes in recent months. The requirement is to inform clients about the ESG approach, sustainability risks and impacts of their funds both in the pre-contractual information and in regular reports. This information is based on the asset manager’s own sustainability concept and follows defined rules (see box “Information requirements”). Thus, there is no universally valid pattern; the reports can vary greatly from asset manager to asset manager. In general, it can be said that the “greener” the asset manager’s sustainability concept, the more quantitative the quarterly report must be. For the reporting framework for adverse impacts (“PAI” for Principal Adverse Impact) alone, the legislator has provided for over 70 different disclosures. These must then be applied to the individual client portfolio or broken down, e.g. to show the ESG score. This is work that cannot be done manually. Here, too, the investify platform performs valuable work.

“The asset manager provides us with the portfolio data, commissions a sustainability data provider and we process everything for the customer, prepare the reports in the look and feel of the asset manager and digitally deliver the individual reports per customer,” Brock explains the process. It must be taken into account that the reports already have to be prepared – even though many questions and definitions on the topic of sustainable investment as well as methods for calculating the exposure of a portfolio have not yet been finally regulated by the EU Commission.

A lack of standardisation regarding the disclosure of ESG data will remain a major challenge for the industry in the future. While the EU is already relatively far advanced with concrete requirements, a direct comparison with global investment products is becoming increasingly difficult and complex, mainly due to different requirements of the national authorities. It will therefore be all the more important for individual providers to have partners who implement regulatory requirements or offer assistance with implementation.

“The big advantage is that the asset manager only has to think about his sustainability concept once, we then create the digital suitability check together with him, he implements his concept in asset management, provides us with the portfolio data and receives the quarterly reports automatically,” explains Brock.

The alternative would be not to offer sustainable concepts at all – but that is hardly a serious solution. After all, those who offer sustainable investments do something for the environment, meet the expectations of customers and society and, last but not least, open up new business opportunities for themselves – especially among the next generation of investors. According to a study by Allianz, a disproportionate amount of money is flowing into sustainable funds and similar products. The economists expect green investments to continue to grow by 13 percent per year, while traditional asset management will only grow by four percent.

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Sustainability in asset management practice