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Is Carney’s $130 trillion Climate Pledge the tip of an iceberg for an industry under pressure?

Posted by Pierre-Yves Rahari on 23 November 2021

One of the highlights of the COP26 has been the $130 Trillion pledge taken by the Finance industry to combat climate change[1]. This commitment will certainly make its way to Investment Management firms and add to the pressure on the industry to deliver on an ESG[2] agenda. This colossal venture faces two almighty challenges; first is expediting the infrastructure and mechanisms needed in order to deploy and oversee the fund and second is realising the environmental and physical returns needed to create a net-zero climate solution, for which it will be no doubt be held accountable.

An industry under pressure

These are not the only pressures facing the industry. Today, all eyes it seems are on Investment Management firms which are expected – besides delivering financial returns –  to meet high standards of product adequacy; transparency in fee composition; risk and liquidity management; operational resilience; digitalisation and technology deployment; stakeholder management and governance; inclusion and diversity, to name a few. There are multiple reasons that drive these requirements for change but suffice to say that they have their source in the market, competitive, societal, technological and regulatory dynamics that govern the industry.

And yet, the wave of changes seems to roll in unabated. More items and questions are piling up on the agenda of boardrooms, which are very strategic in nature. For example:

  • Do we need to launch into M&A transactions to gain scale?
  • Do we need to integrate a wealth management platform in our offering?
  • How do we continue delivering the outcomes investors are looking for with a bull market likely to end? Can a mixture of product offerings such as Index ETF’s, Private Markets, and other asset classes, including crypto currency, bring an answer to this question?
  • Can less liquid assets become more easily tradable with the introduction of tokenization, blockchain and digital ledgers??
  • How do we answer to the demands of the new, young generations of investors who want to balance investment returns with strong ESG impact, transparency and accessibility?
  • How do we integrate technology even more into the industry’s operating models, and push digitalisation even further?
  • How do we manage and make sense of the significant amount of data available to the industry, not only in the investment process, but also in the distribution process, in product design, performance attribution, and of course in the formidable amount of reporting and disclosure the industry is processing?

The list above is staggering, yet not exhaustive. That said, because these initiatives are not mutually exclusive, they require the industry to address simultaneously several fundamental and strategic questions, while executing complex and unprecedented operational change project[3]. This is quite a delicate balancing act, which in our experience is best executed when firms can think strategically about their organisation on an on-going basis, and articulate visions that translate into practical, executable, and measurable steps and actions.

These changes demand a lot of focus and resources; and their implementation is not without challenges. One example often quoted is the difficulty facing Investment Management firms on building an ESG framework in a less than adequate technological and regulatory environment[4]. Despite all, it is fair to say that the industry has been ploughing and working through these change projects without respite[5]: ETF’s have raised more assets than ever before; the rhythm of M&A transactions in the industry has gone unbated; blockchain technology has moved from tech labs to distribution channel; the model of personalised investment funds is emerging. The list goes on but seems to indicate that boards and executive teams are steadily integrating in their decision making the economic, environmental, technological, demographic, and regulatory changes that are shaping the future of the investment industry.

The industry is caught in a never-ending wave of changes but this is no bad thing as Investment Management firms seem to be prepared to make the necessary choices to deliver on changing expectations and conditions, and even commit to a $130 Trillion pledge to combat climate change.

 

[1] As reported by Reuters: https://www.reuters.com/business/cop/wrapup-politicians-exit-cop26-130tn-worth-financiers-take-stage-2021-11-03/

[2] Environmental, Societal and Governance

[3] As brilliantly argued by E. Ravano and R. Wigglesworth in the latest episode of our podcast series “Coffee with … AlgoMe Consulting”: https://www.algome-consulting.com/2021/11/16/coffee-with-algome-consulting-podcast-has-the-wave-of-changes-passed-its-peak-in-the-investment-industry/

[4] Luuk Jacobs covered this topic in his recent AlgoMe Consulting insight article: https://www.algome-consulting.com/2021/10/28/fair-winds-and-following-seas-unlikely-post-cop26/

[5] Even during the pandemic …