Capco Switzerland’s third ESG event on 21 September focused on the rise of ESG in asset management, building on the successes of our earlier events on ESG trends in Switzerland and recent developments in climate risk.
The event brought together a distinguished panel: Joana Torres, CIIA, Head Product Management & Development Asset Management, Helvetia Versicherungen Schweiz, Dr. BA Florence Anglès, CAIA, FDP, EFFAS certified ESG analyst, Head of ESG Switzerland, Capco Switzerland, Dr. August Benz, Head Private Banking and Asset Management, Deputy CEO of the Swiss Bankers Association (SBA), Isak Ahlbom, CAIA, Head of ESG Methodology & Products, Bank Julius Baer, and Jonathan Duncan, Chief Impact Officer, REYL Intesa Sanpaolo.
The event was chaired by Capco’s Audrey Miguel and Florence Angles. Below we present highlights and quotes from the panel discussion.
ESG TRENDS IN ASSET MANAGEMENT
Jon Duncan, Chief Impact Officer at REYL Intesa Sanpaolo, noted that ESG investing is not only an emerging trend that is here to stay, but also a long-run systemic shift. Market players failing in ESG will no longer remain competitive. He also observed that there is a growing scepticism among clients towards ESG. Clients demand more transparency in their portfolios’ sustainability attributes. “The importance of smart data is growing in response to this client need,” he emphasized.
Joana Torres, Head Product Management & Development Asset Management at Helvetia, also noted that ESG is becoming a basic requirement for investments of all kinds. However, there are differences between a bank's products and an insurance company's investment options. An insurance company is focussing on long term investments, for example, in real estate, while liquidity proves to be more important for a bank. Joana points out that next to reliable data, education on ESG is important for employees – especially asset managers – and clients, in equal measure. "The plethora of data, rating systems and labels create confusion – that’s one reason why scepticism is growing among regulators and investors alike," she said.
As Head of ESG Methodology and Products at Julius Baer, the third speaker Isak Ahlbom spoke from his experience of implementing ESG in a large international context. He added that ESG is currently in a mini crisis. Some ESG products have underperformed year-to-date due to the sector performance of commodities and energy markets. This has led to some scepticism among investors towards ESG. Furthermore, the development of ESG products, methodology, reporting, and data evaluation as well as education and training of employees, require a lot of resources. “This is the time to invest into processes and products covering ESG to stay competitive” he concluded.
According to Florence Anglès, head of ESG at Capco Switzerland, ESG affects not only investment products, but also risk management at financial services institutions. ESG risks must be integrated into risk management frameworks and large financial institutions have already started this process.
REGULATORY DEVELOPMENTS IN SWITZERLAND
According to August Benz, Head Private Banking and Asset Management, Deputy CEO of the Swiss Bankers Association (SBA), the issue of regulation has also become more prominent in Switzerland. From the SBA’s point of view, Switzerland has a liberal approach. Consequently, there was limited discussion about regulatory requirements prior to 2019. With the preparation of the CO2 Bill that was voted on by the Swiss people in 2021, it became clear that regulation around sustainable finance and investments is also emerging in Switzerland. Simultaneously, the issue of greenwashing was also put on the table. At the time of speaking, Switzerland does deliberately not have a regulatory definition for the term greenwashing. Instead, Switzerland focuses on three possible constellations of greenwashing – at a product level, at an institute’s level and at the point of sale.
However, FINMA (the Swiss Financial Market Supervisory Authority) has published guidelines on the recognition and prevention of greenwashing in November 2021, and the Swiss industry is expected to prove that it can address sustainability issues such as greenwashing. According to August Benz, the self-regulatory mechanisms provided by the SBA guidelines render a legal regulation of sustainable investments obsolete at this point in time. “The Swiss financial industry is well equipped to find the right balance with relevant minimum standards ”. He added that the first purely sustainable asset manager role and pension fund were created in Switzerland. Switzerland has been a pioneer in this field as evidenced by its 40 years of sustainable finance history, even before ESG became a regulatory issue
Florence Anglès argued that for Swiss financial institutions, the EU regulations are equally as important as those in Switzerland. The next wave of EU regulations that are applicable for banks will not only cover the area of investments, but will broaden the scope of ESG to include, for example, credits as well as integrating ESG into firms’ strategies. A look at major international institutions confirms that ESG has gained strategic importance and is being integrated into risk management. “This should be the case because sustainability risks are real risks that need to be managed,” she concluded. Therefore, the ECB (European Central Bank) is now trying to answer the question of whether stricter capital requirements would be necessary due to climate risks, which will be reflected in new regulations.
GROWING COMPLEXITY IN DATA AND REPORTING
Isak Ahlbom noted that reporting is a key challenge for ESG. Today, it is no longer enough to look at indicators and use them to develop and evaluate products, but it is necessary to also report on the indicators. To do this, the entire investment universe needs to be mapped in terms of ESG and the quality of the relevant data needs to be assessed. This is a complex undertaking as the data quality from internal and external sources is varying. External data sources are particularly challenging, and it is important to understand what methodology is used to collect and evaluate the data. Often, the data is premature, as ESG data is retrospective and does not always reflect firms’ future plans.
The non-financial reporting of companies which are also included in reporting and valuations of products, is another challenge, according to Florence Anglès. The problem here lies in the fact that non-financial reporting is not subject to third-party assessment, and companies can in principle report what they want. In the future, it is expected that non-financial information will also be audited. Joana Torres added that it is also important to develop a broader perspective that goes beyond ESG to understand the context of data and to use it effectively in reporting or when assessing products.
When asked about the main best practices in the usage of ESG data, Jon Duncan mentioned that it is paramount to develop a standardized understanding about the meaning of sustainability and ESG within companies. Education and training of employees play an important role in achieving this. In Isak Ahlbom’s opinion it is also important to align with other banks in order to improve the quality of data from external data providers. It is central to achieve a baseline for ESG data quality in the market, which is why it is important to align with other banks. And financial institutions are willing to work together, as they all face the same data challenges.
All speakers and panellists agreed that ESG is here to stay and will survive the current economic crisis. Challenges such as poor data quality and complexity are being addressed by financial services institutions jointly to create a common ground for ESG, as ESG is becoming the baseline. Hence, ESG data is evolving into one of the main drivers of innovation and, combined with new technologies, it will become the solution rather than the cause of the lack of standardization in regulatory reporting, which is a major challenge for the financial industry.