Ruby Paramanathan, Director, Client & Distribution – Wealth & Asset Management, KPMG

The way that we describe ESG and embedding it into an enterprise uses seven thematic areas, which resonates with a number of asset managers that we have spoken to.

It is largely driven by the regulations, whether it be the FRC stewardship code through to the EU sustainability disclosures and tax on any new regulations.

It provides a good framework around the various strands of ESG when you think about implementing it across your organisation.

When we talk about sustainability risk integration, the key word that jumps out is systematic integration across the organisation.

"The way that we describe ESG and embedding it into an enterprise uses seven thematic areas"

This is around considering sustainability risk as a new pillar of your risk management framework, as well as embedding it within your investment process and investment decision making.

It is about considering it in the same stance that you would credit or liquidity risk.

The other areas that are quite prominent, which will create a lot of thought and work within organisations are around product.

For example, product governance, suitability for your investors and the disclosures that you put around your ESG products, all of which are as important as the products that perhaps don’t satisfy ESG criteria.

"At a product level, disclosures in underlying investments are very important."

The regulations have stipulated the types of disclosures to include. An important point to draw out here is that at a product level, disclosures in underlying investments are very important.

This is an area where I see the creation of quite an uplift in terms of effort, thought in terms of what organisations need to be thinking about.

Linked to this is the data point and having a close collaboration with the data providers, which will help you in determining the right disclosures and having confidence around the messaging that you are displaying.

Another important point is around stewardship and engagement. I have seen a rise in asset owners, clients and end investors having a vested interest in how asset managers are engaging the underlying companies and being very transparent and informative about the types of discussions that they are having.

"The best way to think about embedding ESG is almost to think about a business transformation and operating model transformation"

The outputs they are getting through due diligence and really showing an active engagement role, both through voting statistics and conversations and dialogues that they are having with the board level.

The best way to think about embedding it is almost to think about a business transformation and operating model transformation, with technology and data being enablers.

This cuts through your governance and organisation and is about making sure that every corner and function of the organisation and hand off is very clearly embedded.

Several asset managers had ESG products within their product ranges for some time. The thought process that they are going through now is around ensuring that there is a level setting, i.e. that the strategy at a corporate level, the mission and vision that you set, is very clear and well understood.

"Training and awareness are key when we think about consistent application and investor messaging."

This is distilled through your client communications but also it comes through your organisation’s DNA, which means that it is understood by your employees and shareholders.

Training and awareness are key when we think about consistent application and investor messaging.

This means making sure that the message is consistent, protected and preserved as it reaches the end investor.

This is where working with your distribution partners, your advisor network, and so forth onwards, to make sure that your ethos, products are well understood, becomes key.

"Data technology is essential"

As with most transformations, data technology is essential, and several managers have understood the differences and variations that you see in terms of external data providers, ratings and methodologies.

Off the back of this they have taken steps to develop their own proprietary analysis and ratings.

Making sure that this is transparent to investors, and that it is well tested and back tested to ensure that on an ongoing basis the data points are consistent and understood and articulated is also very important.

This issue is discussed in further depth in our research report: Taking the Lead on ESG Investing through client reporting which can be found here.

 

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