How fund operators can balance ESG with fiduciary responsibilities

Joseph Porterfield, Director of Tor Capital, discusses with editor Andrew Putwain how fund operators can balance ESG investments with the need to maximise returns.

Andrew Putwain POSTED ON 3/10/2022 11:01:21 AM

Andrew Putwain: A major issue around ESG implementation is the lack of comparable datasets to give good fiduciary reasons for doing certain tasks - how does the industry work on this until such time that there is data to formulate operational strategies?

Joseph Porterfield: This can be frustrating. Firms have adapted and learned over time to address issues – regulatory issues, Brexit, disentangling from EU regulation – but they don’t like operating in the dark. Several regulators have introduced ‘best effort’ language in the regulations, so funds have been given leeway.

On the investment side, companies will need to dig deeper

We are going to see a lot more capability in data provision over time. There may be some variance left in the rating agencies for example and that may not be a bad thing, but overall, datasets and data provision is going to dissipate as an issue. This is because the new reporting is on carbon emissions, and regulatory environments in the US, UK, and EU require companies to produce this information so it will be available in time. A fund operator will not have an issue here unless they are investing in a market where there isn’t this requirement, and they must extract the data themselves.

On the investment side, however, companies will need to dig deeper.

Andrew: How does a fund operator balance an investor’s preference for ESG funds when there might not be fiduciary evidence for it?

Joseph: There were funds marketed as giving preference to achieving an ESG target over the highest available return. However, we are increasingly seeing that investors don’t feel like they’re necessarily giving up the highest returns when they invest with a fund operator that also incorporates consideration of sustainable factors.

Good managers will address this in a more full-throated ways with better data

There are three driving forces in ESG. Regulatory, as in the reporting requirements. Then market demand, which is investors wanting to see funds launch products that are ESG compliant.

The third force that is going to convince hard-bitten asset managers is materiality. They want to know if it will materially impact the return they will make, and we can be increasingly confident that the data says yes. Good managers will address this in a more full-throated ways with better data.

Andrew: Do fund operators in different jurisdictions need to watch out for certain ESG principles being watched more closely - for instance, the regulatory environment in the US vs UK and how this affects what a fund operator can do?

Joseph: Yes, there is potential for this divergence. For the regulatory environment, in the UK-post Brexit funds, many have clients in the EU, and this could be a cause for concern. However, regulators did understand this and aren’t trying to operate in disharmony or impede business. The language that UK fund operators are addressing for the first time this year was aimed to synchronise with the EU’s. The UK Financial Conduct Authority’s (FCA) proposals are based on a similar approach to that of the EU’s Sustainable Finance Disclosure Regulation (SFDR).

Regulators have given leeway in recognition of the costs and resources that may be needed

There may be an element of additional reporting for firms that work in both jurisdictions. Then you must comply with both, and this could lead to double work and added cost. In deference to concerns about data and fund operator’s investment in existing infrastructure, the FCA also opted for ‘comply or explain’ to soften the blow as firms adjust. Once again, the regulators have given some leeway in recognition of the costs and resources that may be needed.

This is part two of the conversation. To read part one, click here.


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