This week, Victoria Gillespie, Head of ESG Services at INDOS Financial featured in Portfolio Adviser’s latest article: What’s on the horizon for ESG investing in 2021?
Victoria comments on how the SFDR will require all asset managers to publish policies on their website outlining how sustainability risks are integrated into their investment decision making processes.
You can read more of the article by visiting: https://portfolio-adviser.com/whats-on-the-horizon-for-esg-investing-in-2021/
2020 has been without precedent. What started as a largely positive year for the asset management industry and service provider community was derailed in February and March as the seriousness of COVID-19 became increasingly acute. INDOS Financial reflects on the last 12 volatile months and explores some of the momentous changes which have swept across the financial services industry.
COVID-19 is a once in a century crisis, but asset managers have proven resilient. While some fund houses did struggle with the logistics of working from home initially, business has largely continued with limited disruption to operations. That the industry was able to navigate this sudden transition so seamlessly is reflective of its significant investment into business continuity planning (BCP). BCP and operational resiliency have been areas of scrutiny among institutional investors and regulators such as the UK’s Financial Conduct Authority (FCA) for several years now. Consequentially, many global asset managers had well-drilled BCP processes in place well ahead of the COVID-19 pandemic.
Longer-term challenges of COVID-19 still persist. Working from home and the ongoing inability to physically meet with or travel to prospective investors has made fundraising more difficult. Similarly, some institutional investors are not entirely comfortable with conducting operational due diligences on fund managers remotely through video links. This is particularly true in cases where there is no pre-existing relationship. As a result, the number of investment mandates being awarded during this period has slowed. Keen to avoid any additional unnecessary operational challenges, a number of managers have also delayed making changes to their operating and service provider models.
Few positives have emerged from COVID-19, although the continued rise in interest in ESG (environment, social, governance) investing is one of them. In fact, ESG-orientated investment products registered net inflows during the crisis. Data shows European sustainable funds attracted around €30 billion in the first three months of 2020, whereas European-based funds overall shed €148 billion. It is projected that investors will continue to allocate into ESG products as a result of COVID-19. Federated Hermes found 85% of its UK independent financial advisers had reported a jump in clients asking to allocate capital into ESG products since the beginning of COVID-19. These impressive inflows come as ESG funds reported outperformance during the pandemic, evidenced by recent BlackRock data which found 94% of sustainable indices beat their parent benchmarks in Q1.
Despite the market dislocation, regulators have been keen to stress the importance of robust fund governance. In 2020, the Cayman Islands pushed ahead with its Private Funds Law, which subjects private equity firms to regulatory registration requirements and depositary provisions effectively modelled on the EU’s AIFMD (Alternative Investment Fund Managers Directive). COVID-19 has highlighted how important it is for asset managers to embrace best practices when it comes to fund governance and oversight. Irrespective of the pandemic, it is critical that managers and fund boards do not let standards slip otherwise the interests of investors risk being compromised during this difficult time.
As Brexit rapidly approaches, UK asset managers are concerned that the existing delegation framework could be materially altered for the worse by EU regulators. Right now, third country managers can appoint an EU management company, who will outsource investment management back to the manager allowing them to distribute their products cross-border without impediment. In a letter penned over the Summer, the European Securities and Markets Authority (ESMA) made public some of its objections about delegation, warning that the current set up carried operational and supervisory risks. Although it is unlikely delegation will be outlawed, there is a possibility it could be restricted making it harder for third country managers to sell their funds inside the EU. Any attempt to limit delegation will, however, result in pushback across an industry that is keen to ensure an open global market for asset management.
Asset managers demonstrated remarkable agility and quick thinking when COVID-19 struck. With the pandemic now approaching its ninth month, the industry has adjusted to the changing circumstances. At the same time, the crisis has reaffirmed the role of ESG as an investment strategy in its own right and the continued importance of effective fund governance.
As the year moves towards a close, it is important to remember that Directors and Senior Managers of Financial Service Providers (FSPs) (including Funds and SIBL-Registered Persons) operating in the Cayman Islands are required to undertake annual Cayman Islands specific Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) training.
The Guidance Notes, in conjunction with the AML Regulations, state that Directors and Senior Managers should understand the statutory duties placed upon them, their staff and the firm itself given that these individuals are involved in approving AML/CFT policies and procedures. In addition, senior management (including Board of Directors) should receive a higher level of training covering all aspects of AML/CFT procedures, including the offences and penalties arising from the relevant primary legislation for non‐reporting or for assisting money launderers, the procedures relating to dealing with production and restraint orders and the requirements for verification of identity and retention of records.
INDOS Financial delivers annual “in person” rather than electronic AML/CFT training as an inclusive part of its AML Officer services to Cayman Islands fund clients. We would be pleased to provide equivalent training to other firms that may be considering upgrading their AML service provision, or outsourcing the AML officer duties for the first time.
Please contact Matthew Queree, Head of AML Services at INDOS Financial, if you would like to find out more.
On Monday 9th November, as part of the AIMA Fund manager briefing series, INDOS was pleased to present to members, covering developments in fund governance, noting how it has evolved over recent years and why it is such a key area for regulators and investors alike, particularly given perceived failings in governance which have led to a number of high-profile fund suspensions such as Woodford last year. Below is a summary of some of the key messages from the presentation.
Following the 2008 financial crisis, there have been two key drivers behind improved governance within the alternative funds industry; new regulations such as AIFMD and Senior Managers & Certification Regime (SMCR) and investor focus on operational due diligence including the role and composition of fund boards. A fund board which is diverse and independent, and which can perform robust oversight and challenge will add value.
In the UK governance and culture are clear FCA priorities; a key outcome of the SMCR is to improve the standards of fund governance and recent FCA Dear CEO letters to the asset management industry deliver a very strong message; overall standards of governance generally fall below FCA expectations.
On a global basis, we are also seeing regulators take actions and increase regulatory oversight to continue to improve manager and fund governance and therefore investor outcomes.
The Depositary is viewed by the regulators as a cornerstone of good fund governance and regulators are also keen that processes have real substance both in locations and in reality. However, the role of the Depositary can sometimes be interpreted as a tick the box exercise. Often the Depositary is affiliated to the Fund Administrator which presents a conflict of interest given a core role of the Depositary is to oversee many of the outputs of the fund administration process.
Increasingly we are seeing awareness increase amongst managers, fund boards and investors of the advantages of an independent solution where the Depositary acts without potential conflict and in the best interests of investors thereby enhancing the governance structure. In addition, forward thinking managers are taking a more holistic approach to compliance and governance and leveraging the role performed by their service providers, such as the depositary, as a core part of their governance and oversight model.
Governance will continue to evolve. The core building blocks of good governance are in place but firms should always ensure they have the right service providers that add value, highlight risks, and enhance the governance structure.
Independent depositary and fund oversight provider INDOS Financial has announced it has been appointed to provide AIFMD depositary services to Triple Point Energy Efficiency Infrastructure Company plc (the “Company”), an investment trust which was admitted to trading on the Specialist Fund Segment of the London Stock Exchange on 19 October 2020.
The Company will invest in a diversified portfolio of energy efficiency assets in the UK, which have a positive environmental impact and which facilitate the transition to a low carbon economy in accordance with the UK government’s overall environmental targets. The Company’s investments will focus on the core sectors of low carbon heat distribution; social housing retrofit and industrial energy efficiency; and distributed generation.
Commenting on the appointment INDOS Financial CEO, Bill Prew, said “We are delighted to extend our relationship with Triple Point Investment Management by providing AIFMD depositary services to the Company. The appointment marks a new milestone for INDOS, becoming our fifteenth LSE listed client and taking the value of listed funds under our oversight above £2.5 billion”.
Jonathan Parr, Partner and Head of Energy at the Company’s Investment Manager, Triple Point Investment Management LLP, commented “The INDOS team have done an excellent job setting up the depositary services to support our new launch, and we look forward to our continued relationship”.
About INDOS Financial
Founded in 2012, INDOS has grown organically, developing solutions recognised as industry-leading within the fund oversight and depositary service space. As of September 2020, client assets under depositary oversight had grown past $35 billion and a further $10bn which form part of the INDOS AML (Anti-Money Laundering) service clients. INDOS also provides a range of Environmental, Social, Governance (ESG) services for asset managers and their funds.