Back together - now for the future

The first half of the event provided attendees with insights from industry experts covering the economic outlook for UK funds, key ESG thematics and regulatory updates from the Investment Association. Here are our top takeaways.

UK economics

Marcus Wright, Economics Lead at NatWest, kicked off the event by sharing his economic outlook for UK funds. He began by setting out how after an unprecedented round of monetary tightening around the world, rate cuts might not be too far away. Wright then discussed how gilt yields have recovered somewhat since the chaos induced by the Mini Budget, but that the real economy is continuing to slow down. What’s more, if interest rates remain high people will be paying much more on their mortgages, hitting their disposable incomes and feeding into lower corporate profitability. He also explained how energy market dynamics represent a big risk to the European economy.

ESG outlook

Bradley Davidson, ESG Lead at RBS International, was up next, discussing three key ESG themes from a fund perspective: regulation, greenwashing and the difference between ESG risk and impact.

With respect to regulation, Davidson pointed out that the investment community is faced with the challenges of divergent guidance. In October the UK’s Financial Conduct Authority launched its long-awaited consultation on the UK’s Sustainability Disclosure Requirements, introducing guidance on issues such as sustainable investment labels, disclosure requirements, naming and marketing conventions and rules for distributors. Its most fundamental difference with EU and US legislation is its lack of a “do no significant harm” measure. Davidson urged everyone in attendance to engage with the consultation, explaining that “The Industry has led the way with ESG investment and now we need to collaborate with the FCA to facilitate a credible and robust sustainable investment market”.

Moving on to greenwashing, Davidson made clear that there’s a big difference between firms that deliberately pull the wool over investors’ eyes about their funds’ green credentials and those that are taking action to go green but that have ultimately failed in some respect. Davidson explained how it’s important to be fully transparent: “Greenwashing should not be a concern for those continuing to provide investors will the full picture, warts and all. Taking action to accelerate the just transition and level up global communities has to remain the priority”.

Finally, he spoke about what the goal of ESG investment actually is – whether it should be to manage risks linked to ESG issues or to make a positive impact. He explained that even though the figure of $18 trillion of assets in ESG funds is impressive, most of the funds do not have impact objectives. Davidson rounded off by questioning whether asset managers can truly mitigate ESG risks without addressing the root causes.

Regulatory insights

Peter Capper from the Investment Association, provided a regulatory update, and started by explaining that regulators’ main aims are to ensure investors receive value for money, that they’re properly protected, they understand what they’re investing in and that there are no risks to financial stability.

He then focused on two main areas: Consumer Duty and Long-Term Asset Funds (LTAFs).

When it comes to Consumer Duty, the FCA is becoming frustrated with the amount of instances of funds taking decisions that don’t have their customers’ interests at heart. It has therefore introduced a 12th consumer principle: “A firm must act to deliver good outcomes for retail customers”. The duty applies to all entities in the fund distribution chain, but generally a firm will only be liable for its own acts and omissions. The Duty comes into force next July, but firms should have finalised their implementation plans in October.

Capper then went on to talk about LTAFs, a fund structure that was introduced in 2021 to help more investors access private assets. LTAFs can invest in unlisted securities and unregulated collectives and originate loans, and their redemption period must be no more frequent than monthly. No LTAFs have been launched yet, but they’re in the pipeline at several firms. Capper expects the first launches in H1 2023.

The FCA has launched a consultation to determine exactly how LTAFs should be viewed to make them easier to distribute. At the moment, LTAFs are classed as non-mass market investments, but the plan is to reclassify them as restricted mass market investments, which would make them easier to sell in the retail market.

Capper rounded off by talking about how the range of “black swan” events that have plagued the market in the past few years, including property fund suspensions and the recent problems involving LDI, have raised questions about the asset management industry’s impact on the financial system. Regulators have become very interested in the industry as they perceive some fairly big systemic risks, such as liquidity mismatches. Regulation of money market funds may be revised because some funds came under pressure in 2020, and we can expect increased regulation in the coming years as the industry continues to grow.

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