SUSTAINABILITY IN WEALTH MANAGEMENT PART I – ESG OPPORTUNITIES AND CHALLENGES FOR WEALTH MANAGERS

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Sustainable investing continued its market momentum throughout 2020 with significant growth in assets globally, increased public scrutiny and the introduction of regulatory requirements. As asset managers are moving fast, attention is now turning towards the wealth management community. In our Sustainability in Wealth Management blog series, we attempt to unpack key opportunities and challenges ahead of wealth managers as they are navigating through a transforming landscape and evolving customer needs.

1. Rising demand

Assets invested in funds that incorporate Environmental, Social and Governance criteria have been breaking records in 2020, which may mark the beginning of a new era and signal that sustainable investing is entering mainstream thinking. The numbers really do speak volumes in this case: European Sustainable Investment Funds* totals assets have reached EUR 1100 billion as of the end of 2020, recording inflows of EUR 223 billion, almost doubling the inflows of EUR 126 billion the year before.

2. ESG: a point of differentiation for wealth managers

The current wave of rising interest and oncoming regulation presents a unique opportunity to embrace ESG and respond in a way that improves client conversation and relationships. COVID-19 has not only accelerated the demand for better digital tools but also inspired investors to focus their attention on social and governance concerns. This mindset shift offers wealth managers the chance to implement ESG holistically, incorporate it into their product offering and operating model, and to define their own sustainability value proposition.

3. Education is key to turn interest into adoption

While the interest in ESG and sustainable investing has certainly been growing amongst retail investors, their adoption is still lagging behind that of institutional investors, putting pressure on wealth management professionals to guide their clients and turn these interests into investment decisions. As investors are looking to limit their investments’ adverse impact, wealth managers are increasingly being asked to provide more information and educate clients on sustainability issues.

4. Regulatory requirements are getting more concrete and demanding

The Sustainable Finance Disclosure Regulation (SFDR) is imposing a set of new mandatory disclosures for practically all financial market participants (FMP) and financial advisers. As part of the EU’s legislative measures, the directive aims to bring more transparency and harmonized communication about sustainable investing. The regulation requires FMPs and financial advisers to provide standardized disclosures on the integration of sustainability considerations into their investment decision process. In addition to entity-level disclosures, financial products (funds, etc.) need to be classified according to SFDR definitions along with detailed explanations of their sustainable objectives.

5. ESG Data

Robust data is of critical importance when implementing ESG  getting this data and communicating it to your client in the right poses a serious challenge. While asset managers are typically well equipped with the necessary data and have their in-house ESG teams, the case for wealth managers is different, as the majority of them cannot afford teams of the same size or direct access to the data.  In the not-so-distant future they will need to start reporting ESG data at a portfolio level to clients, hence being able to integrate this data into their existing workflows will be equally important.

Dorsum has ESG investment-ready wealth management software solutions for advisors and clients alike. Find out more about our complete WealthTech Suite under the products and services menu.

To learn more about ESG and sustainable investing, read our e-book and stay tuned for the next episodes.

*Source: Morningstar, European Sustainable Funds Landscape 2020

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