Keeping on top of ESG: Five essentials for Channel Islands’ asset and wealth managers

Environmental, social and governance (ESG) expectations keep rising. So do the opportunities for investment, innovation and growth. What’s less clear is what this all means in practice for you as an asset and wealth manager or administrator here in the Channel Islands? How then can you make sure you’re up to speed on the practicalities of ESG?

ESG issues are setting new benchmarks for investment performance and how businesses are run within asset and wealth management (AWM). ESG is also a dauntingly vast universe that stretches from the move to a more sustainable low carbon economy to businesses’ responsibility to the communities in which they operate.

Little wonder then that the first question we invariably hear from clients is “where do we begin?”. They also want to know what ESG actually means to an AWM business here in the Channel Islands? You not only have to meet local expectations , but also keep pace with policies set by parent companies and regulators in the various jurisdictions you deal with.

To answer these questions, this post sets out a five point ‘starter pack’ for getting up to speed on ESG here in Jersey and Guernsey. But before we get down to the action points, it’s worth giving a brief overview of why ESG is now so critical, as this frames what you need to do now.

Driver one: Regulation

ESG regulation is now reaching across all your investments and operations, rather than just designated ‘impact funds’ . The EU is setting the pace with stringent new disclosure requirements, which put pressure on funds to demonstrate that they have considered sustainability risks affecting the performance of investments, and even explain why they might choose not to consider ESG factors . Other jurisdictions including the UK are likely to follow.

COVID-19 is adding to the impetus by focusing policymakers attention on how to build a fairer and greener economy, and the financial services industry’s key role in this.

Driver two: Client expectations

A survey of what really matters to investors we at PwC carried out in 2019 underlined how quickly ESG has moved to the centre of their agenda. This not only reflects ethical and reputational priorities, but also the recognition that these can be achieved alongside strong financial returns. We are now seeing ESG priorities being driven through the AWM value chain. Tender criteria for service providers don’t just look at portfolios and experience, but also the operations of the business and its record on sustainability and inclusion.

As demand for ethical investment increases, ESG is a significant growth opportunity for AWM businesses here in the Channel Islands. With private markets set to play a key role in financing the development of green infrastructure (the World Resources Institute estimates that more than $5 trillion a year in funding is needed), our financial centres’ alternatives expertise could be especially valuable.

Driver three: Your mission

ESG is an opportunity to reinforce your organisation’s purpose as a force for good in society. This can not only attract investment, but also help to make you a magnet for talent.

The five essentials

How then do you get to grips with all these various demands without overloading your business? In our view, there are five key considerations – ‘ESG essentials’:

Key consideration one: How can you satisfy client expectations?

However strong your values and community links, clients want documented policies and evidence to demonstrate this. Without them, you could lose your competitive edge. . But don’t worry, with a little effort you can check where you are now and identify gaps that need bridging. At the business operation level, this can be supported by local independent standards (e.g. Jersey’s Eco-Active Scheme and the Jersey Good Business Charter, or Guernsey’s ESI Monitor) and then on to full internationally-recognised accreditations (e.g. environmental management ISO 14001). At the individual fund level, there are various voluntary standards and labels available, such as the Guernsey Green Fund, or the IFC’s Operating Principles for Impact Management. And we estimate that almost two-thirds of funds managed or administered from the Channel Islands are connected to signatories of the Principles for Responsible Investment.

Key consideration two: How can you identify and manage your most material risks and opportunities?

The key ESG risks likely to have financial implications can vary markedly by business, jurisdiction and stakeholder expectations. They can also interact – decisions in one area such as tax or recruitment impinging on fund commitments, for example. That’s why the G in ESG – governance – is so important. Does your board have the required skills and understanding to oversee ESG? Do they have the necessary information? How often is it reviewed?

We worked with the World Economic Forum to develop some principles for climate governance. These can also provide a useful set of starting questions for other ESG issues.

Key consideration three: How can you keep up to date with fast-changing regulation?

ESG is covered by a patchwork of local regulations, and are ramping up rapidly. It’s important to be clear about what rules apply in any particular jurisdiction you serve. A particular focus is whether investments are genuinely green. This is complicated by the lack of standard definitions worldwide. The financial services regulators here in the Channel Islands are exploring ways to standardise fund demands and keep pace with the global regulatory agenda, albeit the approaches differ – accredited green funds in Guernsey and proposed sustainability disclosures in Jersey.

Key consideration four: Do you have a handle on the data?

While clear, timely and actionable data is essential, significant gaps remain. ESG ratings agencies are proliferating, but different systems can give very different results, with much depending on the relevance of underlying datasets. Capturing data and developing analytical skills within the business offers a surer way forward. As fund administration becomes increasingly automated, upskilling personnel to support investment analysis could provide a valuable opportunity for talent redeployment and a differentiator for your business.

Key consideration five: Have you defined your purpose?

Far from being a vague or philosophical question, this is now a business priority. To articulate your purpose, it’s important to be clear about what your clients, investors, employees, suppliers, and community want from you beyond financial return. Ultimately, this is about defining what matters to you as a business and what drives this. Businesses that take this strategic view tend to find it easier to stay ahead of rapid changes in regulatory and client demand.

Building from here

What we’ve set out here will get you to base camp and avoid the risks of falling behind. From there, you can begin to think about how to set the pace and turn ESG into a value driver and differentiator. In future posts, we’ll be looking at some of these essentials in more depth. We’ll also be exploring how ESG dovetails with other key aspects of the AWM revolution including digital and workforce transformation.