2021, the year of the ESG business change

Sustainable Finance has long been a topic mostly discussed outside of the financial services industry. More recently, the approach chosen by many corporate and financial services institutions to demonstrate their commitment to sustainability matters was to voluntarily sign the UN Principles for Responsible Investment (PRI) or to endorse the UN Sustainable Development Goals (SDG). 

Yet, the external forces impacting the Financial Services Industry have since 2020 considerably changed since 2020. Both from an investor and a regulator perspective, the financial product ‘manufacturers’ and ‘distributors’ are confronted with new and rapidly changing standards and expectations. The political landscape has ‘elevated’ sustainability as one of the key goals of the political agenda in the EU (‘EU Green Deal’) and, more recently and prudently in the US, for the coming five years, with consequences way beyond this timeframe.

The ECB, EBA and the CSSF have now transposed these governance requirements into regulations and guidelines shaping a new relevance for ESG matters (Environment, Social, Governance) across a financial organisation by imposing governance, investment and disclosure standards serving ESG goals, and making Sustainability a strategic matter in 2021, on the same level than investment performance.

Sustainable Finance has thus two angles: a regulatory compliance (must-have) and a business strategic impact on the business model. The business strategic angle is in comparison with preceding regulatory changes even more important, since it’s not only shaping the regulatory compliance, but even more deciding on the competitiveness and ‘economic sustainability’ of the financial institutions and asset managers.

Business impacts & strategic decisions for asset managers

The impacts for the asset managers of UCITS and AIF are stretching through the full value chain. The regulator targets the inclusion of sustainability/ESG criteria in the investment approach. This will require managers to re-design their investment process and to gather additional ESG data on their investment targets. These targets (i.e. the corporates) will be required to disclose more sophisticated sustainability data. Such disclosure will be either imposed by voluntary (e.g. TCFD) or mandatory standards (e.g. EU Non-Financial Reporting Directive) or solely upon request by the investors.

As such, the strategic business decisions for an asset manager are, (i) ESG approach (i.e. limited number of dedicated products, decentralized data management) or (ii) to include the sustainability criteria as a baseline in all its portfolios and investment strategies. No action is not an option!

Whatever the choice, all these changes will be subject to disclosure requirements starting March 2021 and subject to minimum technical criteria, defining sustainable business activities, starting 2022/2023 (i.e. Taxonomy).

Business impacts & strategic decisions for a distributor/investor

On the investor side, the impacts will be different between the wholesale/retail investors and the institutional/fiduciary investors (i.e. pension funds, insurance companies). 

For the wholesale/retail investors, the distributors subject to IDD or MiFID will ‘ask’ the investors about their preference to invest in a sustainable manner. The probability to have positive responses being very high, distributors need to decide on two main strategic choices: (i) what new (sustainable) products to add to the product shelf and (ii) how to include the sustainability objective into the client risk and investment profile.

In particular the management of a double investment objective, i.e. financial yield and sustainability, will stress the discretionary and investment advisory teams and systems, triggering operational and upskilling challenges.

Finally, some institutional investors have been, for  years, voluntarily imposing sustainable investment behaviours onto their product providers and investment managers. This trend is now ‘formalised’ via the EU rulebooks, formally requesting EU professional investors to retain sustainability as one of their fiduciary goals. So, the pressure from ALL EU institutional clients will further accentuate the strategic choices of the manufacturers to consistently and credibly implement sustainability into their product range, most likely on a much broader scale than anticipated today.

PwC would like to invite you on a journey throughout the upcoming 12 months focusing on the relevant regulatory milestones, facilitating industry standards setting and enabling business managers to understand the impacts of ESG on their respective areas of responsibility. Please join us on this distinct journey into the future of our industry… and be our guest.

Contact us

Olivier Carré

Financial Services Leader & Sustainability Sponsor, PwC Luxembourg

Tel: +352 49 48 48 4174