The clock is ticking for asset managers to provide arduous and complex Environmental, Social, and Governance (ESG) data on financial funds mandated under the Markets in Financial Instruments Directive (MiFID II) by January 2023. To meet European regulations, the wealth management industry will need to embrace advanced digital tools to account for investors’ ESG preferences – leading to a second digitalization wave. Read on to learn how this will impact technology providers.
The global wealth management industry is at an inflection point. The strong growth in assets under management for wealth managers has been fueled in part by the digitization wave sweeping this industry.
Generational wealth transfer and the rise of the next breed of investors have redefined advisory services from a physical to a hybrid model. This step change in wealth management firms’ traditional customer base has led to increasing demand for tailored and digital customer experiences.
The first digitization wave resulted in firms increasingly collaborating with FinTechs, building in-house innovation capabilities, and adopting digital technologies such as Artificial Intelligence (AI) and analytics to develop new products, services, robo-advisors, and business models.
With the rise of sustainability and ESG preferences in investing, a second wave is coming
As investors and advisors settled into the new normal and wealth management services became accessible to all, another demand pattern emerged. Next-generation investors are cautiously choosing the right wealth manager to help manage their wealth.
Today’s new client base is increasingly attracted to companies with strong sustainability and ESG standings and wants evidence from wealth managers of funds’ internal and external sustainability commitments.
However, the rise of greenwashing poses serious reputational risks for wealth managers. The lack of a single source of truth in analyzing ESG data means that no standard terminology exists to accurately classify any company’s ESG standing.
Investors are baffled by the sheer increase in ESG funds entering the market and are concerned about their authenticity. Millions of dollars in penalties have been levied on large financial services enterprises over greenwashing claims this year alone.
New MiFID II guidelines on ESG
To fight greenwashing, the European Union has passed MiFID regulations to promote sustainable finance products and facilitate greater transparency for all participants. Under this amendment, advisors will need to identify client ESG preferences and incorporate sustainable products in portfolios accordingly.
However, classifying ESG data for each fund across 580 mandatory, conditional, and optional fields is a mammoth task. The disparate data sources make it difficult for enterprises to accurately account for ESG scores. Another bigger emerging problem is how all this data will be used to connect to investors’ sustainability preferences.
Because of the data complexity and challenges facing asset managers to comply, the original deadline has been extended from August 2023 to January 2023.
What will this mean for wealth technology providers?
The industry already faces competition from emerging FinTechs who capture market share and provide contextualized experiences. On top of this, a significant gap exists between the new guidelines and the current state of investment platforms to meet these requirements.
Asset and wealth managers will need to assess whether their current platform can ensure compliance with this changing regulation and partner with technology providers to modernize their digital solutions.
This will be challenging as we believe the user interface in many wealth management technology platforms has not evolved at the same pace as the core functionality, which will hamper the industrialized delivery of personalized and contextualized experiences at scale across hyper-segments.
The new regulations will require adding an ESG layer to existing platforms to account for investors’ preferences. As sustainability and ESG preferences become ingrained and drive technological changes in current platforms, expect to see a second wave of digital advancements coming.
Wealth technology providers will have to accelerate their ESG roadmaps in the next 12-18 months and show value from these initiatives. We recommend providers take the following actions:
- Craft roadmaps to ensure their technology platforms comply with the new regulation
- Engage proactively with wealth management clients to help them navigate the nuances of the regulatory change
- Invest in a partnership ecosystem for ESG data providers that can help enterprise clients solve the data gap
The compliance deadline extension has given wealth managers much-needed extra time to assess their technology offerings and develop roadmaps to incorporate ESG preferences. With the compliance date fast approaching, providers will need to move quickly to invest in their platforms to provide the digital solutions the wealth management industry needs to meet the MiFID II ESG amendments.
Has your organization made changes to meet the sustainability and ESG investment regulations? Please reach out to [email protected] to share your experiences and learnings.
Also, don’t miss our LinkedIn Live event, Sustainability and the CIO’s Office: A Powerful Connection, to learn how the diversity of people and power of technology can strengthen your sustainability strategy.