The significant increase in reporting requirements driven by fund labelling has created substantial challenges for fund managers launching sustainable and impact investing-focused strategies. As such, financial services firms are rethinking the structure and process of their investment, sustainability, risk and compliance teams.
The regulatory burden was originally shouldered by the fund managers “intrapreneuring” these new strategies. We have subsequently seen that evolve to first the central sustainability teams and more recently integrated into the compliance and distribution functions.
This has resulted in some investors hiring individuals who originally had traditional risk and compliance backgrounds before developing specialist sustainability-related regulatory knowledge via external qualifications or stints within a regulator, NGO, think tank or specialist consultancy.
From a firmwide perspective, most traditional managers would rather not risk short-term losses by being overly burdened by the costs involved in fundamentally rethinking their team structure and operating model. Instead, they look only to move incrementally, just in front of the regulatory license to operate.
Regulators’ role
Ultimately, these costs will need to be accounted for through the value created for clients and as such, an overhaul of the entire way that value is attributed in financial services products.
Regulators must lead by setting a progressive and robustly enforced agenda with realistic timescales that allows for implementation at scale. We do not have the time to wait for the market to evolve so that financial institutions develop these skills and capabilities themselves.
If they are to promote transition at scale, regulators need to be mindful of the small talent pool of specialist capability in the market, as well as the implementation gap this deficit creates. If, for example, the regulatory reporting burden becomes too great, too quickly, market participants may struggle to enact the outcomes for which the regulation was introduced. This is one of the reasons we have seen a retrenchment from some funds previously positioning themselves as Article 9 moving to an ‘8+’ narrative.
When we assess progress across different regions, we can see that historically APAC has lagged Europe and the US in how quickly employers have added sustainability roles to the workforce. That trend is starting to turn now, particularly due the regulators in the region acting to positively encourage sustainability focused hiring, exemplified by the Monetary Authority of Singapore. Whereas the integration journey of some European financial service firms has taken more than 10 years, we are now seeing firms in APAC can move faster.
Best-in-class approaches
Sustainability specialists who join more traditional financial institutions in leadership roles need to be supported by a different type of organisational narrative and structure in order to maximise their impact. We see this via executive sponsorship, which allows them to focus on the rapidly evolving challenges and opportunities of the sustainability transition and invests in both their own teams and in adjacent business units to be effective engines of integration to protect this forward-looking capacity and optimise its value.
They also need to have, or quickly develop, exceptional business and leadership capabilities to deliver value across the whole of their companies’ operating model. We are witnessing the more progressive companies rethinking the way in which employees are assessed and incentivised to drive for positive impact.
Progressive financial institutions are no longer looking exclusively for talent coming from their competitors, but also for skills and experience developed outside the sector. Knowledge of biodiversity and the blue economy can contribute to truly differentiated investment strategies, for example, and is more likely to have been gained through work at an NGO, philanthropic group, think tank, specialist consultancy or SME corporate.
To be best in class, financial institutions have hired in expertise to support the integration of ESG risk factors, sustainability themes and impact principals at both a functional and strategic level. Such hires are certainly a step in the right direction.
However, there are simply not enough experienced practitioners across the global economy to create change at the pace required. To drive transition at scale, financial institutions need a blend of both traditional and sustainability expertise who can work together to deliver financial products and services that produce the required outcomes. This means integrating a much wider pool of individuals, including those from outside financial services, while at the same time upskilling existing headcount and rethinking organisational design.