Continuously increasing regulatory pressure
Regulatory pressure continues to intensify. The European Union continued to expedite the implementation of the EU Taxonomy, Disclosure Regulation and Benchmark Regulation as well as enhancements of all financial market regulations and directives during the COVID-19 pandemic.
The EU Recovery Funds that are proposed to restore the COVID-19-affected EU economy are designed with an emphasis on long-term projects that meet specific climate and energy plan criteria. Significantly, some 25% of the €750bn will be allocated to the EU climate action program, adding additional pressure to the implementation of the sustainable finance regulations.
Wealth and asset managers are challenged to stay ahead of the regulatory tide and prepare for upcoming application deadlines – while critical technical standards and specifications are still under discussion and not yet finalized.
The current framework for sustainable finance is hard to completely understand and navigate. Overlapping initiatives and requirements need to be streamlined in order to identify the opportunities and challenges ahead.
In line with the European Commission’s direction from its consultation on Sustainable Finance, EY teams share the view that it will be critical to leverage the private sector, and in particular, the financial sector to support the transition to a sustainable economy, which should be complemented by government action which supports industry efforts.
Challenges and opportunities for ESG investments
While the COVID-19 pandemic provided different challenges and opportunities for the different asset classes, all investments might profit from the further inclusion of ESG factors. By considering additional ESG factors within the investment due diligence process, more information can be gained on a company’s culture, operational resilience, and risk mitigations. An enhanced ESG investment process as well as climate risk and stress test modeling might also improve protection against tail risks.
Accessing the additional data and information on social and governance factors might prove challenging. Considering the “S” and “G” factors within stress tests requires quantitative and comparable input data, but unlike environmental data, social and governance data are often hard to obtain.
Wealth and asset managers must prepare for upcoming sustainable finance regulations, implementing the EU taxonomy as well as disclosure requirements that will support a comparability of ESG investments.
Further opportunities may also arise for new categories of impact funds. As discussed, social impact, health and wellbeing, and access to digital infrastructure appear to be key aspects of a successful pandemic response. Therefore, EY believes that impact funds focusing on these topics can provide further the next opportunity for product innovation in wealth and asset management.
Finally, given that several governments have already announced recovery plans connected with sustainability requirements, new ESG infrastructure investment opportunities are to be expected, thus paving the way for more ESG integration within the alternative investment fund sector.
EY teams are already working with leading asset managers to help with:
- Regulatory gap and impact analysis and implementation support
- Stress test and modeling including ESG risks
- Enhancement and implementation of ESG strategy and methodology
- End-to-end product design including impact funds
- Fund structuring and implementation of new processes and interfaces to administer the new products