Whether you binge on sport, politics or finance news, you may have noticed few words appear in headlines as often as the word ‘rules’ recently.
Over the past month alone, major stories have emerged around rules changes to sports like rugby, uproar over whether former Prime Minister Boris Johnson breached rules governing ex-ministers, and countless stories surrounding EU trade rules.
But arguably, the industry most obsessed with rules over recent months has been the asset management sector.
Indeed, an onslaught of new rules continues to polarise opinion in the investment space – whether it is intricate reporting, esoteric guidelines on inducements, watertight risk management standards or Solvency II data requirements.
And that is ignoring where the greatest degree of change is occurring from a regulatory reporting perspective: ESG investing.
The latest out of the ESG corner comes from across the pond, with the US Securities and Exchange Commission reporting it is cracking the whip on greenwashing funds by requiring a broader range of labelled funds to prove that 80 per cent of their holdings match their names.
Before they know it, a fund manager could find themselves in deep water just because they failed to grasp the specific regulatory nuance that suddenly deemed their Luxembourg fund non-ESG complaint.Many argue the sheer scale of ESG compliance now faced by asset managers across the globe serves as a deterrent both to investing in ESG and doing what asset managers do best: beating the market. Indeed, many firms are even lobbying to scrap these rules.
But to all the naysayers that say these new rules only serve to stifle innovation and growth in asset management, and sustainable investing in particular, it is worth asking what the alternative solution is.
Rules, at the end of the day, are rules. Surely, it would be a better use of an asset manager's time trying to best work out how to interpret and apply the rules efficiently and effectively instead of lobbying to scrap them completely.
When it comes to ESG regulation, the issue is not so much the objectives that the rules are looking to achieve, it's more about the ambiguity surrounding how they should be applied.
Certain asset managers may try to create several international funds that incorporate ESG into their investment objectives, only to discover what is considered ‘ESG appropriate’ differs significantly depending on the region in which the fund is domiciled.
Before they know it, a fund manager could find themselves in deep water just because they failed to grasp the specific regulatory nuance that suddenly deemed their Luxembourg fund non-ESG complaint.
Then there is the delicate issue of who is responsible for the rules inside an institution.
If, for instance, rugby teams are currently grappling with a decision over whether the players or coaches are responsible for adhering to new rule changes, then the same issue can be applied to asset management.
Does the responsibility fall onto the shoulder of the portfolio managers making investment decisions, or is it the compliance and risk officers?
The truth, as unpopular is it may be, is that everyone is responsible.
There will always be a compliance officer ticking boxes, the culture of compliance starts at the investment coalface, with those investing capital on behalf of clients.
Everyone in asset management has a direct personal responsibility to meet the spirit of rules governing ESG investment.
There is a need for a common understanding and the correct interpretation of the various regulations, from the sustainable finance disclosure regulation to various fiduciary and best interest standards across different parts of the world.
Ultimately, investors are generally more inclined to invest in funds that are fully compliant with applicable regulations, especially in the ever-evolving world of sustainable finance, where investor appetite is increasing constantly.
There is no question that compliance serves as a critical factor in building trust and confidence between investors and fund managers.
Perhaps abiding by new regulation ensures asset managers are seen as forward-thinking.Compliance often includes provisions that protect investors' interests, such as transparency requirements, accurate reporting, and safeguards against conflicts of interest.
Investors appreciate these protections, as they feel their rights and investments are being prioritised.
Therefore, whenever the next fiddly ESG reporting obligation is enforced, or the latest risk mitigation obligation is announced, instead of jumping on the ‘we need a lighter touch regulatory regime’ bandwagon, perhaps a more pragmatic approach would be to carefully assess how actually adhering to the rules can help improve the performance and popularity of a fund.
After all, funds are consistently looking to demonstrate professionalism and integrity to foster trust among current and potential investors.
Perhaps abiding by new regulation ensures asset managers are seen as forward-thinking, as opposed to looking to the past and longing for a return to the old way of doing things.
In the ESG arena, in which forward-thinking is the name of the game, investors that take this approach will have the best chance of ruling the market over the years to come.
Colin Clunie is head of EMEA operations at Clearwater Analytics
