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Clear Path Analysis held a roundtable in Frankfurt with 16 investment groups to understand the major themes impacting ESG investment, operations, and reporting. The panellists shared the current difficulties they’re facing, the key challenges of the future, and how they are overcoming barriers to sustainable investing. The discussion now forms part of a new report, published in conjunction with Clarity AI.
For asset managers and institutional investors, the path to sustainability is fraught with challenges. Increasing reporting requirements mean that entire teams are being dedicated to staying afloat in a tidal wave of regulation.
While the participants acknowledged that this regulation could help drive focus on ESG, many also said that constantly changing legislation was a barrier to building effective sustainable investment propositions.
“The challenge is that companies operating in global markets need to comply with different regulations simultaneously."
Dr Jörn von Elsenau, ESG manager at HANSAINVEST, said: “We have more and more ESG funds in our portfolio. There is pressure on us to fulfil the requirements, which are getting more intense as we speak. In the next few months, we will try to fulfil all this in a manner that won’t bring us to the brink of greenwashing. This is the most difficult part.”
For those organisations that operate internationally or on a global scale, the problem is compounded by multiple, sometimes conflicting, sets of standards. Staying on the front foot is made harder by different regimes across borders, meaning that a fund that is ‘green’ in one jurisdiction may not be considered an ESG product in another.
Ángel Agudo, Board Director & Head of Product at Clarity AI, said: “The challenge is that companies operating in global markets need to comply with different regulations simultaneously. And adapting products to these always-evolving requirements has also become a challenge.”
"How can we ensure that the data required for our investment process can be transformed into what the client has to report on their side."
Thomas Roulland, Director and Head of the Sustainability Standards and Analytics team at Allianz Global Investors added: “It’s become a real challenge to create a product that can be sold across all jurisdictions. You need to have a selection of funds that will be targeted for a specific market. Indeed, it might be difficult for a client, or even for us, to explain that a fund can be sustainable in Germany but not in France due to different requirements. Every time there is a change, we need to understand what it is and implement it across the entire value chain.”
This difficulty is even causing some organisations to pull out of certain markets. For instance, where a firm cannot comply with differing reporting requirements.
Matthäus Fischer, Head of Legal at Twelve Capital Group, commented on the United States: “It seems like every [US] state regulator does their own thing, which makes it hard for us. How can we ensure that the data required for our investment process can be transformed into what the client has to report on their side. There are a lot of external data providers involved, which has cost application, and that also has an impact on the strategy.”
He continued: “How can we ensure that we can still have a net margin internally, offering a product the client wants without being able to adhere to reporting disclosure regulation? It ultimately means in certain markets we simply don’t serve because we can’t necessarily provide the data required to fulfil the label or reporting obligations.”
Perhaps the biggest criticism of ESG standards and regulations is that it is too retrospective when clients want to be looking ahead. This is compounded by the fact that it’s nearly impossible to know what the next reporting trend will be.
"I met an asset manager recently who asked how they could detect the next EU taxonomy-aligned company. That’s difficult to get from the current data.”
Von Elsenau said: “More and more people come to us and have the situation that you said that this is a backwards view, and we need to have some transitional data and we want to invest in some brown companies that are sensitive about their business, and they want to become green. We have to say no, it’s not possible.”
Quentin Dehem, Head of Strategic Clients, Europe at Clarity AI, added: “What we hear from clients today is they want forward-looking indicators. Climate is one of the topics, but it is only one part of the challenge. There are a lot of different factors and it’s difficult to know which is next. I met an asset manager recently who asked how they could detect the next EU taxonomy-aligned company. That’s difficult to get from the current data.”
The takeaways from the discussion were clear: regulation is the chief concern around ESG investing and operational management in today’s fund space. The volume of data and information required to adhere to the rules can be laborious for those involved and the ever-changing legislation means that companies have to dedicate outsized resources to monitoring it to make sure they stay compliant. This is further complicated by only partial connectivity between different countries; what is compliant in France is not so in Germany. What makes good business sense in Belgium won’t be in the UK.
To cope with this going forward companies will need new solutions to ease the workload, such as AI and will need to learn to work more closely with industry bodies and regulators. It will require a mindset change from the old ways of doing things in order to succeed in this regulation-heavy, ESG-conscious world.
