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FinTech Specialists Retool as Clients Clamour for ESG Services

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Growing demand for sustainability disclosures from investors and regulators has seen service providers to financial institutions retool and create new products for their clients.

While solutions that enable corporates to identify and report their own ESG metrics have entered the market in large numbers over the past few years, there has been a quieter expansion of tech that enables banks and asset managers, including private and wealth managers, to gather, compile and report portfolio performance. Other new software services are giving banks the tools to exploit emerging ESG markets. Such products have become particularly popular among smaller, fast- growing segments of the ESG market, including private and wealth management.

The clamour has come as Bloomberg forecasts about US$50 trillion will soon be tied up in assets with a green element to them. Private and wealth investors claim an ever bigger slice of that pie. According to LGT Capital Partners, the percentage of private wealth managers addressing climate change through their investment policies rose 13 per cent in the past year, to almost half of them. Separate data from Capgemini forecasts that wealth funds and investors will hold $5 trillion in ESG-linked assets by 2025, almost four-fifths of it by individuals in the higher-earning bracket.

Experts predict this growth will come as millennials begin to inherit the wealth of their forebears and move a huge chunk of it into investment structures that reflect their progressive values.

At the same time consultancies that specialise in advising companies and investors on ESG matters have mushroomed to a $40 billion industry, according to a survey last month by Environment Analyst.

Among companies that have bolstered their ESG offerings in the past year to serves these markets are due-diligence technology provider Diligend and banking software company Temenos.

Due-Diligence

Diligend last year began providing FEG Investment Advisors with diversity, equality and inclusion (DEI) due-diligence capabilities. This enables FEG, which also offers outsourced chief investment officer (OCIO) services, to gather ESG credentials alongside operational due diligence documents from investment managers used by its client base of mostly non-profit institutions such as higher-education and community foundations, who oversee a combined $72bn in assets.

“We’ve seen a continual increase in an interest in what we term ‘responsive investing’,” FEG senior responsive investing analyst Lilly Ambrosius told ESG Insight. “Since a meaningful number of FEG’s clients are not-for-profit, our clients often have environmental or social missions and either have been integrating ESG considerations for years, or have been discussing integration more recently.”

For Diligend this has meant building ESG and DEI reporting functionality into its due diligence platform. Through it, clients can set up a due diligence questionnaire (DDQ) that can be sent to investment managers explaining what ESG data is required from them, how to get it and present it.  While the system provides uniformity of data to the investor, it also provides flexibility for the managers, so participation rates and completion rates are much higher than traditional data requests using email and spreadsheets.

Questionnaires from the main sustainability reporting organisations can be hosted on the platform, including the European Union-approved European ESG Template for Sustainable Finance Disclosure Regulation (SFDR) reporting, Institutional Limited Partners Association (ILPA) and the Principles for Responsible Investment (PRI). Alternatively, clients can create their own questionnaires to send to their managers.

“We found that businesses are using the platform specifically for DEI and ESG data collection, particularly those in the alternative and private markets,” said Fiona Sherwood, Diligend chief marketing officer. “That data is not really publicly available anywhere, so our clients are using our solution to collect specific data points that they can’t easily find anywhere else.”

The platform also lets financial institutions decide what ESG metrics are material to them and set up customised dashboards to view and analyze the data accordingly, Sherwood told ESG Insight. Among Diligend’s clients are sovereign-wealth funds, university endowments, private and public pension funds and investment banks.

Sherwood said the company has seen a rise in requests for ESG-linked services on the Diligend platform.

“We’ve seen growth particularly in private equity and private markets, because the data is really scarce, so private data collection is becoming the most effective way to gain an edge in ESG investing,” she said.

Exploring New Markets

As well as onboarding new technology for regulatory reporting, banks are also taking advantage of third-parties to provide the infrastructure to capitalise on ESG demand within narrower markets. Software specialist Temenos has put sustainability metrics at the front of its new wealth management platform for banks. Built within its Tememos Wealth solution, the new feature provides data and analytics so that managers of the assets of high net-worth individuals can offer better-informed advice and decisions on investments for their clients.

“We collect ESG data, put it in our own internal format and then we distribute it along the chain up to advisers and clients,” explained Temenos product director Alex Duret.

Data is provided by MSCI, Bloomberg and other providers and Temenos will offer some analytics. A dashboard user interface lets clients interrogate sustainability metrics from the instrument to the portfolio level, deploying positive and negative screening functions and risk-management capabilities. Temenos Wealth will also provide compliance checks.

“In the way we have given clients the ability to set their level of risk for other factors, so we do for ESG,” Duret told ESG Insight. “You can set the level of sustainability you want in your portfolio.”

Temenos entered the ESG fray with a software-as-a-service package that enables lenders to calculate their own carbon footprint. More sustainability products are planned for the future and ESG is being “percolated” across all of Temenos’ cloud-based software, which also includes applications that cater to retail, challenger and central banks as well as asset management services, credit unions and private lenders.

The feature was launched after the EU updated its Markets in Financial Instruments Directive (MiFID II), requiring investment managers and advisers to seek the sustainable investment appetites of their clients.

“The regulation doesn’t say explicitly how they should do that, so we’re providing a template and example for how banks can,” explained Temenos product director Alex Duret. “Of course, they can change it as they wish, but we provide something out of the box so that they can at least be compliant.”

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