Navigating the whirlwind of regulations

One of the main challenges faced by wealth managers in the ESG space is how to navigate the whirlwind of new and existing regulations. Janine Hofer-Wittwer, CFA, Senior Product Manager, Financial Information, SIX, is responsible for ESG Regulatory Data Services. We spoke to her about the challenges of plotting a route through the recent developments in the ESG landscape.

What ESG data-related questions are your clients wrestling with?

Regulations are top of mind for everyone. The EU’s progression with SFDR and the Taxonomy, as well as the ESG amendments, which now apply to Markets in Financial Instruments Directive II (MiFID II), are all hot topics.

What are they and when did the MiFID II ESG amendments come into force?

These amendments relate to banks and investment companies, which issue or distribute investment products in the EEA. The ESG amendments both come into force this year. Phase one was launched on 2 August 2022: this states that sustainability preferences must be integrated into suitability assessments. And on 22 November 2022 phase two will come into effect: this means that sustainability factors must be integrated into product governance.

Did this force new players into action?

Under the MiFID II ESG amendment, institutions must now ask their investment clients if they have sustainability preferences. And often if you ask retail clients whether sustainability is important to them, many of them will say ‘yes’. That means that you then need to offer them an appropriate sustainable product. As a direct result of this, we now see high levels of interest from wealth managers in ESG related topics.

Are these managers not arriving at the party rather late?

There are indeed several institutions, which have been involved in sustainable investing for a long time. These are generally more sophisticated in terms of ESG investing and related data, and they also have big dedicated ESG teams. So, for these parties the regulatory challenges may be less of an issue because they are already used to working with ESG information.

Do they have different data demands than the new arrivals?

Certainly. The more established ESG parties want much more raw, granular data. They want the underlying data points to reach their own conclusions, rather than relying on an ESG rating that someone else has calculated. They want to analyse all the different data points, get data from multiple sources and providers and do their own analysis. Some investors not only want to reduce sustainability risks, but actually have a positive impact on the environment or society with their investments. There is a very wide spectrum of interest in ESG Data. There is no ‘one client’. But all these new regulations have certainly changed the landscape.

Do you think the ESG marketplace is maturing now?

Absolutely not! It has not matured yet. It has certainly picked up momentum in recent years. ESG has now become a topic for everyone. Aside from MIFID II, there are many other EU regulations as well as new legal initiatives in other parts of the world. In Switzerland, we have new regulations on the way, and the US, the UK and Hong Kong for example are also developing new ESG recommendations.

How does Switzerland see these developments?

Although we are not in the EU, we are affected by the EU regulations as are our clients. Swiss Financial Institutions have many cross-border clients and the debate here is often whether we should adopt the latest EU regulations or develop our own vision. However, the Swiss Bankers Association has announced guidelines that state that if financial advisors and investment managers adopt the EU regulations, then they are compliant.

To what extent can you help clients with the various challenges regarding ESG Data?

One key strength of ours is certainly our knowledge of regulations in general. As a company, we provide data for over 70 individual regulations. That is a reason why we are focussing on ESG regulations as we are already a very strong provider of solutions in that space. But we also act as a marketplace for third-party data. We offer our clients data from MSCI, Morningstar/Sustainalytics, Moody’s and we also have a partnership with a climate risk data provider. In addition, we have an offering in the ESG sentiment, or alternative data space. We act as a one-stop shop because our clients already get a lot of data from SIX, so it’s easier for them to receive their ESG data from us as well and have that supplied through the delivery capabilities which they are familiar with, as these are already integrated in their systems.

How can you make sustainability data management a natural component of business to support investment decision-making and regulatory disclosures for your clients?

I think from a risk perspective, sustainability data management is today already becoming a natural component. Nowadays if you want to fulfil your fiduciary duties, you must look at ESG risks as well. But then again, we hear from the US that there are people who say the contrary in terms of wealth management because if you had invested in oil companies you would have made much higher returns in the past few months. So, there are very divergent views on this. ESG investing is not for short-term revenue maximisation, but a tool to manage risks in the medium to longer term.

What would help to create more clarity in the ESG space?

I think that more standardisation needs to be applied: especially in terms of terminology. To be fair, that is now starting to happen. We have the International Sustainability Standards Board (ISSB) for example, which I think is an excellent initiative and will help a lot. And the regulations to some extent create standardisation. We also have the Task Force on Climate-related Financial Disclosures TCFD on the climate side. Hopefully, we as a sector can agree to adopt these initiatives and that they will result in a level of standardisation going forward. But while there is certainly still some confusion, I remain hopeful that we can all find a common language!