The wealth and asset management industry can take the lead in the transition to a more sustainable future. It can play a pivotal role when it comes to strengthening environmental disclosures, diversity and inclusion performance, and sustainability governance. In Ireland and across Europe, wealth and asset managers are the stewards of capital for every major sector and asset class. At the end of Q1 2021, €27 trillion was under management across Europe. The responsibility for those funds brings with it an opportunity to play a significant part in the financial industry and its move towards a fair and sustainable future.
WAM leaders have an important role to play in putting pressure on businesses to advance sustainability and move away from carbon-intensive activities. Tracking the sustainability commitments of Europe’s wealth and asset managers not only helps us to monitor the sector’s own progress, it also gives us an insight into the advancement of the sustainability agenda across the broader economy.
EY’s Sustainable Finance Index aims to accelerate the transition to a better future by tracking financial institutions’ progress against a broad set of sustainability parameters. Transparent benchmarking allows for empirical comparisons at the firm, sector and country level as well as helping to define goals, identify best practices and target areas for improvement. With many asset managers calling on corporates for greater sustainability disclosures, it is important they themselves establish leading practice.
Below, we republish EY Global Financial Services Sustainable Finance and Wealth & Asset Management Leader Gill Lofts’ fascinating insights into the recent analysis of the Index. It shows that European wealth and asset management leaders are outperforming their global peers in their progress on the ESG agenda. Although the focus is on publicly listed wealth and asset managers in four European markets – France, Germany, Switzerland and the UK – the position in Ireland is the same: progress is being made.
The Ireland for Finance strategy, which prioritises the development of the international financial services sector, places sustainable finance as the central pillar in the Irish Government’s 2025 Strategy for Financial Services. 2022 will see the establishment of a Sustainable Finance Centre of Excellence, accelerating the sustainable finance agenda in government and across the wider market. This is something that we must all lean into.
While the analysis presented here does not capture the whole of the asset management market – such as the asset management divisions of large banks or insurers, or privately held firms – it offers an important window into the sector, due to the greater transparency and disclosure of listed firms.
It highlights opportunities for asset managers to use their unique resources, and build on incoming regulations – such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) – and the evolving demands of investors to make rapid improvements in ESG implementation and disclosure.
Demonstrating commitment to sustainability is both a moral responsibility and a burgeoning opportunity for Europe’s wealth and asset managers. Asset management firms and the wider financial services industry in Ireland will have a key role to play in financing the transition towards our climate change commitments. Rallying around this essential ambition will define a generation of financial services practitioners, and redefine the industry as we know it in a hugely positive way.
Chapter 1: Focus on wealth and asset management
European firms outperform global peers, but environmental disclosures are comparatively weak.
The Sustainable Finance Index analyses 140 wealth and asset managers worldwide. In this article, we focus on 38 listed asset managers in four key European markets: France, Germany, Switzerland and the UK. This group includes many of the region’s largest firms, spanning a wide range of active and passive strategies. Collectively, they oversee assets AUM valued at approximately US$7.7tn3. Our analysis of this group reveals four key high-level findings.
The average disclosure rate of the 38 European asset managers in our sample (56%) is broadly consistent with that of their global counterparts (50%). However, asset managers lag behind their banking (63%) and insurance (64%) counterparts across the same four European markets. SFDR requirements will encourage all financial organizations to improve their disclosure, but asset managers will need to step up their investments to make material improvements and close the gap with other sectors.
European asset managers’ disclosures are particularly weak in the environmental sphere, where average disclosure rates are just 31%. Firms are struggling to address the inconsistencies of corporate environmental reporting and competing data standards. But, tightening regulation – especially the Corporate Sustainability Reporting Directive (CSRD) and, to some extent, the SFDR which has a particular impact on asset management – will encourage funds to define clear environmental or social objectives and should push up disclosure rates in the near future. In contrast, European asset managers’ aggregate Social (56%) and Governance (67%) disclosure rates are stronger, with governance disclosures being especially driven by regulatory pressure.
Governance disclosure rate: 67% of all governance parameters,
on average, are disclosed against by European asset managers
The Index shows significant differences between large and small asset managers’ standards of reporting. Our sample includes firms with more than US$1tn in AUM and others below US$1bn – a huge size range. European firms with AUM above US$500mn have an average disclosure rate of 65%, compared with 58% among asset managers with less than US$250mn in AUM. Similar variations are apparent in banking and insurance, reflecting the advantages of scale and larger organizations’ ability to invest more heavily in data, reporting and disclosure.
European asset managers’ levels of sustainability disclosure vary considerably between different markets. Among the four countries covered by our sample, UK firms have the strongest average sustainability disclosure rate (60%), followed by French asset managers (55%) and those in Switzerland (51%) and Germany (43%). In part, this reflects the growing environmental disclosure requirements facing UK asset managers, as the FCA prepares to implement the TCFD’s recommendations. UK asset managers also significantly outperform their European counterparts on Governance-focused disclosures (73% for UK vs. 50% for Germany, 64% for Switzerland and 62% for France) due to the demanding corporate governance reporting requirements set by the Financial Reporting Council’s Stewardship code. It is important to recognise the role of regulators in driving greater disclosure and we expect the gap between UK firms and their European counterparts to narrow as the regulatory agenda gathers pace.
Chapter 2: Areas for improvement
Asset managers must improve environmental reporting, D&I and sustainability governance.
As well as providing high-level comparisons between different countries and sectors, the Index allows us to take a deep dive into asset managers’ sustainability disclosure and reporting. Our analysis identifies three key areas where the wealth and asset management industry should focus to accelerate its progress on sustainability.
Research from the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey showed that 72% of investors now carry out structured reviews of ESG performance, compared with just 32% in 2018. Asset managers may be stepping up their demands for transparency from investee companies, but the Index shows that significant shortcomings remain in their own reporting. For example, despite their growing focus on climate change, just 30% of European firms set targets or objectives related to emissions reduction.
Looking at environmental factors more broadly, 30% of UK asset managers do not report their environmental AUM and this figure rises to 40% in France and Switzerland. This may be due to UK actions such as the development of the Green Finance Strategy, aimed at increasing companies’ ESG disclosures, and the FCA’s 2020 introduction of stricter climate risk reporting rules, as recommended by the TCFD. It is also notable that just 40% of asset managers in France, 22% of UK firms and 20% of those in Germany and Switzerland report making proactive investments in their environmental decision-making capabilities.
Environmental AUM: 70% of UK insurers report
their environmental assets under management
The implementation of SFDR should lead to better environmental social disclosures at the entity and fund level, but asset managers must go beyond regulation if they are to take a position of leadership. One opportunity is for firms to improve the environmental footprint of their supply chains. The Index shows that less than a fifth of French, German and British firms say they use formal environmental criteria when selecting suppliers or sourcing partners.
European asset managers’ average social disclosure rates are slightly higher than the global equivalent (56% v. 51%) but still have further room for improvement, particularly enhancing the disclosures around diversity and inclusion (D&I). In part, this reflects the lack of consistent European regulation around D&I, with stronger regulation around D&I disclosures in France, Norway, Sweden and the UK than in countries such as Germany and Spain.
Improving the gender balance is a particular challenge for the industry. Globally, the average proportion of female employees within wealth and asset management is 43%. Female representation is similar in Europe, where 42% of asset managers’ employees are women. Furthermore, entry-level imbalances are more accentuated at the industry’s more senior levels. UK and French wealth and asset managers fare relatively well on D&I, with greater reporting and a higher proportion of females in managerial positions. Globally, just 25% of asset managers’ board and executive staff are female and European representation is only slightly better at 31%5.
D&I targets: 30% of UK asset managers
set diversity targets across hierarchies
The Index shows that industry leaders are already investing to improve their gender balance. Examples of the areas of progress include childcare provision and flexible working, which enable working parents to manage the demands of work and home life. About a quarter of UK firms and a fifth of those in Germany and Switzerland report providing day-care facilities for their employees. While about three-fourths of UK and 60% of French firms offer flexible working hours to their employees, globally less than half of asset managers in our sample report offering flexible working hours or working patterns. One area for improvement would be to set dedicated diversity targets across hierarchies. Just 40% of Swiss firms and 30% of UK asset managers we analyzed set diversity targets and the figure in Germany is even lower at 20%. Collecting and monitoring a wider range of diversity data – even if much of it could not be made public – would help create part of the wider picture of a more gender-diverse asset management industry.
The Index reveals several areas where asset managers could improve their sustainability governance.
Compensation: On average, 50% of European asset managers report having ESG-linked executive compensation policies in place. However, there are significant national variations, with 65% of UK firms in our sample aligning executive compensation with ESG performance compared with 40% in France and 20% in Germany and Switzerland. Asset managers should focus on disclosing information around ESG KPIs in their executive compensation policies. The SFDR should also encourage asset managers to set remuneration policies that are aligned with sustainability risks.
Succession planning: 96% of UK asset managers report
planning for the succession of executive managers
As wealth and asset managers continue to implement SFDR, they can apply lessons learned to strengthen their own sustainability governance. Implementing SFDR has shown that a clear understanding of each firm’s ESG strategy and level of ambition, backed up by verification of their current ESG risk management and data frameworks, are vital to enhancing governance and driving forward tangible improvements in sustainability performance.
Chapter 3: Looking ahead
Can asset managers demonstrate stronger leadership on sustainability?
European asset managers outperform their global peers on sustainability reporting, but lag behind banks and insurers – significantly so, in the environmental arena and some key social areas.
That is not totally surprising, given asset managers’ relative size and the specific regulatory requirements for sustainability disclosures facing banks and insurers. However, smaller organizations also have huge potential advantages in terms of flexibility and the ability to respond nimbly to changing goals and expectations. The industry has a valuable opportunity to build on regulatory changes such as the SFDR and CSRD, as well as voluntary initiatives such as the Net Zero Alliance, and fulfill its vital role as steward of global sustainability. Areas of improvement to consider include:
Probing, analyzing and understanding are central to asset managers’ ability to nurture the sustainability performance of other sectors. But it will be hard for the industry to drive change elsewhere unless it, too, meets high standards of transparency and disclosure. We look forward to seeing how quickly asset managers can improve their own sustainability performance, and hope to expand the Index’s coverage in future to include other important European markets such as Italy and the Netherlands – as well as those in the Americas and Asia.
It’s never been more important for wealth and asset managers to demonstrate how they are making a difference, and to build transparency and trust with stakeholders.
The EY Sustainable Finance Index uses more than 200 individual parameters to monitor the ESG disclosures of 140 wealth and asset managers worldwide. The analysis is conducted at group level, so our universe of 140 firms does not include ‘captive’ subsidiaries of banks or insurers.
The Index reviews the breadth and depth of every parameter. These are grouped into 25 defined categories, divided between the three pillars of Environmental, Social and Governance. The Index standardizes results based on the size of each organization to assess relative performance across each measure, penalizing firms that do not disclose against certain measures.
Based on this analysis, the Index assesses overall performance against the three ESG pillars, separately and in aggregate, to identify which markets and institutions are leading on sustainability. The Index generates ESG scores and disclosure rates. In this article, we focus on disclosure rates (expressed as a percentage) which are a strong indicator of firms’ commitment to sustainability and willingness to be publicly scrutinized.
The Index is broadly aligned with the Stakeholder Capitalism Metrics set out by WEF-IBC. It is not yet possible to directly map the Index’s 229 individual parameters with the metrics of WEF-IBC’s 21 core themes, as these are still being developed. As WEF-IBC’s work continues, our parameters will evolve with it, allowing the Index to stay aligned with best practice.
According to EY Sustainable Finance Index, a global benchmark comparing over 1,100 firms worldwide on ESG parameters, Wealth and Asset Managers are in an unique position to advance ESG activities, generating long term value. Great importance is given to Environmental and Social Matters.