How do you keep up with the changing governance landscape? Pat Sharman, Country Managing Director, UK, CACEIS, shares how CACEIS goes about developing a culture of sustainable governance.
Asset managers and pension schemes are in a unique position to drive change through their sustainable governance practices. These two areas are closely linked. Asset managers have an important role to play in engaging with and influencing the companies or issuers in which they invest. Pension schemes have a key fiduciary duty to monitor their non-financial risks, such as climate change, and engage in active dialogue with their asset managers. The Task Force on Climate-Related Financial Disclosures (TCFD) is also clear about the role that the financial community plays in promoting sustainable governance by stating that “Large asset owners and asset managers sit at the top of the investment chain and, therefore, have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures”.
CACEIS believes that governance around climate risks will become ever more prominent, led by factors such as regulation, government policy changes and client expectations. For example, the EU’s sustainable finance and climate agenda has led to sustainable finance legislation, such as EU Taxonomy.
Meanwhile, in the UK, from October 2021 all pension schemes over £5 billion in size, and all master trusts, must report on their climate risks in line with the TCFD. In 2022, this regulation will be extended to pension schemes over £1bn in size. And as the UK hosts COP26 this year, sustainable governance will remain a key priority for regulators, policy makers and financial markets alike.
This view is shared by many. In a CACEIS survey of fund professionals in May 2021, 51% of respondents believe that ESG standards will become a mandatory component of investment fund governance and 79% expect tighter regulation on ESG and climate change over the next three years.
Looking at this another way, in a survey CACEIS conducted in September 2021 to UK pension schemes, 79% highlighted that climate risk is high/somewhat high on their agenda.
So how does CACEIS go about developing a culture of sustainable governance so we can guide our clients through this evolving landscape?
First, as custodians, governance is at the heart of everything we do. We’ve always been focused on the importance of robust systems and controls to protect client assets, which has necessitated investment in technology, together with a focus on data infrastructure.
We’ve then developed a client-first and governance-focused culture across all functional areas of the business. We all work towards a common goal, placing our clients at the centre of everything we do. We become long-term governance partners helping them to meet their current and evolving needs. We also recognise that client needs differ market by market and this is why we focus on developing local capabilities so we can be close to our clients.
In the UK, we have a highly experienced team that puts governance and a client-first focus at the heart of everything we do. CACEIS works with asset managers and authorised corporate directors (ACDs) in providing depositary, fund accounting and custody services – delivering governance through safekeeping, oversight and robust data infrastructure.
Turning to the next step, good governance is about providing timely, accurate data that’s flexible enough to adapt to an asset manager or ACDs changing needs and providing the tools to help in decision-making. This involves bringing new, often difficult to create, solutions to the market.
In this context, product governance has been an area of focus by regulators for many years. Today, product development requires a more structured approach, with a deeper forensic analysis on suitability and decision-making, especially around areas such as ‘assessment of value’ (AOV). The FCA recently highlighted challenges with several value assessments. I’m not surprised by this, because AOV is in its infancy. We’ve learnt from direct experience in the pensions industry, with cost transparency, that it takes at least three years of hard work before a reporting standard becomes more consistent. To help UK asset managers and ACDs with product governance, we’re set to launch a new solution that provides a robust framework for product governance to meet the FCA’s requirements, which also includes an integrated process around AOV.
In a nutshell, CACEIS’s goal in the UK is to partner with asset managers and ACDs in supporting their growth ambitions by developing effective governance solutions to help them manage complexity. Creating a client-first and governance-orientated culture in the UK, with on-the-ground subject-matter experts across the funds administration value chain, is key to delivering on our mission of becoming the independent sustainable governance partner of choice in the UK funds industry.
I’ll finish where I started: Asset managers and pension schemes are in a unique position to drive change through their sustainable governance practices. Sustainable governance is the challenge of our time and it gives CACEIS a unique opportunity to do things differently and drive change.