Mark Gillan, Head of Product, AJ Bell.

Mark Gillan, Head of Product, AJ Bell, is speaking at the Fund Operator Europe summit in November. You can see the agenda and register to attend here.

Andrew Putwain: What is the wider fund operations space doing in ESG – where does it currently stand and what is it getting right and wrong?

Mark Gillan: Put simply, the space is doing lots of ESG and plans to do more. ESG isn’t a particularly new concept, it’s been around in various forms for many years, but since the pandemic, there has been a swell in it in the investment space.

Most firms are reacting to that and lots of new products are coming to the market. A lot of providers are doing good work and carving out niches and expertise in new areas. But there are a lot of cookie-cutter products, which firms are launching almost as an additional product just to say you have one.

"Some houses are sticking ESG labels on a product and getting on the bandwagon, where it is not a core concept. It is not being communicated about why it is a good product."

Some houses are managing to build products with good ESG credentials and are also able to communicate that to the investment community. For example, houses are consuming a lot of data and relaying it to consumers in an understandable way aligned to the UN Sustainable Development goals, which includes information on how their investments are aligned, and how investments affect carbon footprint. 

For bad practices, some houses are simply sticking ESG labels on a product and getting on the bandwagon, where it is not a core concept. It is not being communicated about why it is a good product.

Andrew: Are customers wising up to this?

Mark: Yes, it has been a key trend over the past few years. Certainly, before the pandemic, you had a core group of well-versed ESG customers, but that was a fairly small community - now this has percolated across the investment space, and I see more detailed questions coming from a wider range of customers. You used to get the occasional question on securities, but now it is a more sophisticated and deeper dive. They want to know methodologies, exclusions, filters, and whether you offer a more integrated approach.

"We’re not ESG experts or at the forefront so we don’t claim to be. But it’s no longer good enough in the industry to offer a product without the underlying expertise and knowledge."

Andrew: From an operational sphere, what does this mean?

Mark: It means more workload. We’ll be honest; we’re not ESG experts or at the forefront so we don’t claim to be. But it’s no longer good enough in the industry to offer a product without the underlying expertise and knowledge.

For us, it’s twofold, what we can offer is expertise as people with industry contacts and knowledge, but also data knowledge of the underlying pieces of the products that are in a lot of funds.

We use passive products, so we rely on index providers, and we need to know they know what they are doing. We can’t outsource this, or take it over, so we need to be able to view and analyse it for ourselves, and then break it down into digestible chunks for customers.

Andrew: Regulations around labelling changes mean that ESG products are becoming increasingly complicated and burdensome – how do UK funds pick a path to take without knowing the full details about what is coming?

Mark: If you cast your mind back a few years ago, funds could be labelled as anything – various terms were thrown about – green, sustainable, environmental – lots of different labels were used, some of which were synonymous, and some meant different things. Customers were confused especially about the compatibility of products.

"The FCA is due to consult on their labelling methodology again later this summer. I expect that we’ll have a more distilled version of the EU framework."

Recently there has been harmonisation in this area, though there is still no solid legislation about labelling products. The regulators are stepping in and giving firms a nudge, which I think is a good thing.

This is better for firms as it means they can label funds in ways that customers can fully understand. The flipside is that nothing is ever simple, and it’s going to be a complicated methodology. As a UK-based manager of funds, we escaped some of this, because a lot of the regulations have been driven by European Union (EU) regulators and post-Brexit that has had a light touch effect on us. But the UK regulator, the Financial Conduct Authority’s (FCA) recent direction is heading towards a Sustainable Finance Disclosures Regulation (SFDR) type template, similar to the EU’s, and seems to be tweaking it. For firms, the UK is a little bit behind the EU, but I can’t see the UK diverging too much from where the EU is going, so I would recommend monitoring the EU closely. 

The FCA is due to consult on their labelling methodology again later this summer [in 2022]. I expect that we’ll have a more distilled version of the EU framework.

Mark Gillan, Head of Product, AJ Bell, is speaking at the Fund Operator Europe summit in November. You can see the agenda and register to attend here.

 

Please Sign In or Register to leave a Comment.