Sustainability has become a core lifestyle value in recent years, driving demand in the asset management industry for Environmental, Social, and Governance (ESG)-based investment solutions. Nicsa members received updates on both the demand and supply side of the emerging market during a recent Webinar Wednesday event.
Dan Bender, Managing Director at EY, moderated the session, which featured thought leaders from Accenture, BNY Mellon, and J.P. Morgan.
“There's an accelerated amount of news and activity around sustainable finance in terms of both active and passive ESG, and sustainability-themed products,” Bender said. “In satisfying growing demand, there are associated challenges with sourcing and aggregating industry and client data.”
Marcus Hooper, Director at BNY Mellon, said there is a lack of consistency and transparency in ESG reporting and analysis.
“Both asset owners and managers are really struggling with gaps in data and the variance in ESG scoring,” Hooper said. “If you look at Tesla, for instance, you'll see that it scores quite differently according to different data sources and perspectives. And we see that problem consistently.”
Kumaran Ram, Executive Director at J.P. Morgan, said that, as of June 2020, there are approximately $2 trillion in publicly listed funds on the market with an ESG label — many of which were spurred by the Paris Agreement.
“But of those $2 trillion in assets, few have ESG-aligned performance benchmarks — most use conventional benchmarks,” Ram said. “The field of ESG benchmarks is relatively new. At J.P. Morgan, we launched our suite of global fixed-income indices, integrating ESG factors in a composite benchmark, in 2018.”
Scott Reddel, Managing Director of Capital Markets at Accenture, shared his perspective on the issues wealth managers and broker-dealers are currently grappling with.
"When we look broadly at the market, we're in the midst of this $40 trillion great transfer of wealth between generations that's been underway over the last decade and continues to increase,” he said. “Across the board, every financial institution has been faced with shifting their advice propositions to suit the coming generation of investors."
Reddel said Accenture’s research shows that more than 75% of advisors include ESG as a core tenant of the discussions they have with clients and the investment strategies they’re shaping.
“But when you look at where the assets are being invested, the data show that about half of their clients are actually investing in ESG-types of funds and strategies,” he said. “So we see a massive amount of growth, but also just a large disconnect between what clients want to engage in, and what's really being manifested in terms of their investment.”
Navigating the Regulatory Landscape
Bender said greenwashing — the deceptive practice of marketing products as more environmentally sound than they are in reality — is an increasing concern among firms and government agencies. Disclosure obligations already exist in the U.S. under various federal securities laws, including the 1940 Act.
“The SEC’s Asset Management Advisory Committee is in an early-stage analysis of informing policymaking in the ESG space, whether it's a disclosure matter or some other type of regulatory reporting of likely outcome,” he said.
Ran said the regulatory landscape is rapidly shifting, especially when it comes to the environmentally-progressive European Union. In June, the European Parliament formally adopted the Sustainability Taxonomy Regulation, providing a framework for classifying environmentally sustainable economic activity. It also offers a common standard for the definition of a sustainable investment.
“For the first time, there will be common labels, which will be extremely useful in terms of standardization,” Ran said.
Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the Nicsa panel, they do not necessarily reflect the views of Nicsa or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.