Author: IIMI Admin

ESG (environmental, social, governance) and sustainable investment approaches are being integrated more extensively into the strategies of asset managers. According to PwC estimates, ESG-related assets under management (AUM) could reach $33.9 trillion by 2026, an increase from $18.4 trillion last year.[1] Amid this growth, however, greenwashing has become a real problem within the industry and one that threatens its credibility.

Some regulators – including the EU and now the UK FCA (Financial Conduct Authority) – want to tighten the rules on managers making sustainability claims, and require them to specifically define their goals and methods around sustainable investing.   

For instance, the FCA is looking to clamp down on managers mislabelling their funds as being green while simultaneously creating a framework to support investors when looking for sustainable funds.

So how will the FCA go about this?

Firstly, the FCA is proposing three separate labels for funds – ‘sustainable focus’, ‘sustainable improvers’ and ‘sustainable impact’.

There will also be restrictions on how certain sustainability-related terms such as ‘green,’ ‘ESG’ or ‘sustainable’ can be used in product names and marketing for products which do not qualify for the sustainable investment labels. The FCA also added managers should make additional disclosures to clients who want more information about a product’s sustainability.

This comes not long after the FCA wrote a “Dear Chair” letter, in which the regulator described some of the more egregious instances of asset managers making unsubstantiated claims about sustainability to investors.

For example, the FCA observed that one purportedly sustainable investment firm contained two high carbon emissions energy companies in its top 10 holdings, without providing any context or rationale behind it (i.e. a stewardship approach that supports companies moving towards an orderly transition to net zero). 

The FCA is the latest regulator to clamp down on greenwashing. The EU is widely considered to be one of the most advanced markets when it comes to ESG having introduced the SFDR (Sustainable Finance Disclosure Regulation) and the Taxonomy for sustainable economic activities.

The US is starting to take a tough line on managers misrepresenting their ‘green’ credentials as well.  Earlier this year, the US Securities and Exchange Commission (SEC) announced plans to target asset managers with misleading fund names, by demanding firms prove that 80% of their holdings match the names given to their funds. In other words, if a fund has green in its title, then 80% of its underlying assets should be green.

The SEC is also recommending that funds and advisers provide more specific disclosures about their strategies in prospectuses, annual reports and adviser brochures. In the case of managers who claim to be making an environmental impact, they will be required to publish the greenhouse gas emissions associated with their underlying portfolio investments.

ESG and sustainable investing have been littered with challenges, not least because some managers have made spurious claims about sustainability. One of the reasons why this has been allowed to happen is the lack of regulation in the new market.

Although new regulation is welcome – if it improves standards and safeguards investors against miss-selling it is vital that there is a degree of harmonisation between what different market supervisors are doing in terms of their policies –  otherwise it risks sowing confusion, and undermining the industry’s push towards ESG and sustainable investing.

IIMI will be looking to provide feedback to the FCA on these proposals. As part of this, IIMI will be gathering the opinions of its members, particularly those in the IIMI ESG Network. Any correspondence or opinions on this issue should be sent by IIMI members to the executive committee.

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[1] PwC – October 10, 2022 – PwC’s Asset and Wealth Management Revolution 2022 Report

As volatile asset classes go, few exceed the violent and gyrating price swings seen in crypto-currencies. Even so, the events of the last month have resulted in serious questions being asked of crypto-currencies, with some calling for greater regulation of the asset class.

A small chorus of institutional investors – dominated mainly by family offices, high net worth individuals,  smaller hedge funds, and specialist crypto-fund managers –  have built up exposures to crypto-currencies and StableCoins, a type of crypto-currency designed to have a stable price which is pegged to a fiat currency or another tangible asset.

However,  many – including a number of IIMI members –  have chosen to avoid crypto-currencies altogether. Their reasons for avoiding crypto are well-documented. Crypto-currencies are unregulated; have been used extensively to facilitate illegal activities such as money laundering and terrorist financing, while some experts question the basic macro fundamentals and valuations behind the asset class. 

Nonetheless, two events in May are likely to trigger even more regulatory scrutiny of crypto-assets.

Not-so StableCoins

The first involves StableCoins.  StableCoins act as a medium of exchange between the traditional financial world and the crypto-universe, meaning that their values are pegged to conventional assets (e.g. USD, Euro, etc.) so as to avoid some of the volatility which is endemic in crypto-currencies like Bitcoin.

That one of the largest StableCoins – Tether – broke its one on one peg with the USD is likely to invite regulatory intervention. A number of regulators have repeatedly warned that StableCoins – despite the comforting name – could suffer serious losses or become illiquid during stressful market events.

This is partly because of concerns about the nature of the reserve assets underpinning StableCoins amid fears that some StableCoin issuers have provided only limited details about their underlying holdings and how they are managed. In the case of the latter, Tether, for instance, has said this is strictly proprietary information.   

However, a recent article in the Financial Times notes that half of Tether’s $80 billion of reserve assets comprise of US Treasuries, while corporate debt accounts for 25% of its holdings. Nonetheless, a lot of this corporate debt – according to reports – has been issued by Chinese companies.

This is not the first time that Tether’s reserve assets have been challenged by the authorities. In October 2021,  Tether was fined $41 million by the  Commodity Futures Trading Commission for making misleading statements and omissions about its reserves.

While the $180 billion StableCoin market is not systemically important per se,  it has grown exponentially in the last two years and its price movements could one day have a wider market impact than what they do today. As such, the volatility witnessed earlier in the month could usher in further oversight of StableCoins and their holdings.

The crypto-custody model faces tough Questions

The second incident to tarnish the crypto-asset market follows an SEC (Securities and Exchange) regulatory filing made by Coinbase, a publicly listed crypto-custodian which is widely considered to be the dominant provider in this growing space.

Coinbase’s filing warned that custodied crypto-assets “could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” Although Coinbase’s CEO and analysts were quick to point out the company had significant liquidity, the statement has raised eyebrows in institutional circles.

Given that Coinbase is one of the most sophisticated providers in its field, the revelations prompted intense debate about the operating models of the countless other –  and arguably less cutting edge-   crypto-custodians in the market. 

While some traditional bank custodians are looking to develop solutions supporting digital asset trading, incumbent providers have made it clear that firmer regulation is needed in the crypto-custody market.

Crypto will face a regulatory reckoning

The latest turmoil afflicting crypto markets will likely result in sweeping regulations being introduced across these asset classes beyond what is being lined up already.