Major challenges ahead for the Asset Management industry

To the point

• What types of challenges does the fund industry face?

• A changing and uncertain macroeconomic environment - Government intervention of all kinds are creating budget deficits. Various fiscal measures are considered to cover these deficits. Savers and investors are entitled to tax certainty and stability.

• The regulatory challenge – the most important challenge in this area – involves the implementation of the numerous new Environmental, Social, and Governance (ESG) obligations. The European Union has made the development of sustainable finance a priority, and investor expectations are also high.

• The war for talent – skills development in sustainability, digitalization and innovation – is a key issue. We must, therefore, strengthen the attractiveness of the sector and invest in the skills in place. Collaborating with universities and current education centers will help. 

Winter is coming… The unprecedented gas and electricity crisis has led to a surge in energy prices. The joint effects of the crisis have led us all to turn down the heat by at least one degree. When we go shopping, we are shocked that our weekly groceries have become that much more expensive again. "For the times they are a-changin’," Bob Dylan's song echoes through the speaker.

These words are more relevant than ever, certainly for the financial sector and particularly for the asset management sector. I try to remember the importance of looking at the big picture rather than every individual detail. Connecting each element to another and placing them in a broader context is crucial in today's environment of complex challenges. That is why I am not listing every challenge of the asset management sector here, but instead, give you a helicopter view. Of course, things move fast, and this article represents just a moment in time.

What types of challenges does the fund industry face? 

A changing and uncertain macroeconomic environment

We are all familiar with the changing macroeconomic environment that asset managers must consider: we are evolving from a period of low inflation to one of high inflation (due to high energy prices, among other things); rising interest rates; political instability and fear of recession resulting in volatile stock markets where the investor (including the so-called defensive investor) is put to the test.

Since the income of the asset management companies is largely determined by assets under management (AUM), falling AUM (mainly caused by the falling stock markets) means falling income. However, at the same time, costs, such as for purchasing data from data suppliers, are rising.

Government intervention of all kinds are creating budget deficits. Various fiscal measures are considered to cover these deficits. Savers and investors are entitled to tax certainty and stability. The sudden abolition or major changes of a well-established tax framework can always undermine investors' confidence in their government.

Therefore, the asset management industry must deal with macroeconomic consequences that is more uncertain than ever.

The regulatory challenge

A second major challenge relates to the legal and regulatory environment in which asset managers must operate. Those who think that most legislative changes are behind us are wrong. There is still a tsunami of new regulations floating toward the industry that need to be processed.

The most crucial challenge in this area is the one related to the implementation of numerous new ESG obligations. The European Union made the development of sustainable finance a priority. Investor expectations in this area are also high. If, as a professional association, we fully support the approach and the objectives it pursues, in the interest of a sustainable economy and society, the challenge for the actors is no less significant. They must adapt quickly, despite many uncertainties, considering short implementation timelines. In particular, the lack of reliable data to assess the sustainable nature of an investment is one such challenge. This could expose asset managers to the risk of being accused of greenwashing. ESG developments are part of a major transformation that will profoundly impact the financial services industry and more generally our entire economic model. We are only just starting.¹

The evolution of ESG regulations (going from SFDR to CSRD, ESG Ratings, CSDD, Deforestation regulation and global sustainable reporting standards) is one of the biggest projects that the sector has had to carry out, since the UCITS. This requires real understanding. Member states must be careful to prevent distortion of meaning when transposing EU-level directives into national law.

The legal rules have not yet been properly published and some still require clarification, as they can be in conflict with each other. This challenge is recognized by regulatory bodies, such as the European Securities and Markets Authority (ESMA). ESMA's Executive Director Natasha Cazenave recently reinforced their intent “to focus on supervision, enforcement and consistency application of the sustainable finance rules²

In the second half of 2023, a Common Supervisory Action (CSA), coordinated by ESMA, will be launched concerning sustainability risks.

Financial education of consumers

A third major challenge relates to the financial education of consumers.

It is important to note that, in Europe, the population holds a huge volume of savings in bank accounts. In an inflationary environment, sitting on cash, when interest rates on bank deposits remain close to zero, is not the most prudent way to manage finances. The growth potential of the fund industry in Europe, therefore, remains significant. The point is to reinforce the consumer's financial education (so that they understand how money works and can make informed investment decisions) and regroup all relevant initiatives with the aim of increasing accessibility to the markets and improving consumer skills. Without further financial education, we are unable to significantly increase the number of private investors, which is a major objective of the European Commission supporting the sector.

Let's not forget that, in the long term, the first pillar of the pension system (managed by the public sector) will no longer be enough to meet the basic needs of retired people. This is another vector of growth for our industry, which can offer long-term investment solutions that should allow everyone to maintain a certain standard of living once they retire. For investments (whether it be in a pension savings fund or through another fund), it’s important to note that the earlier you invest and the more you stay consistent, the more capital you will make.

The significance of training both applies to people who do not invest today and to those who are already active in the financial markets. For example, as a sector we are required to explain sustainability concepts (taxonomy/SFDR/PAI) to clients. This ensures that there is no misunderstanding between the client's expectations and the offering they are given. The necessity of financial education is an essential area that cannot be over emphasized.

Finally, let us mention that the European Commission plans to take further initiatives (I refer here to its “retail investment strategy”) to further protect investors, either by introducing new concepts and/or changing existing ones. The concept of “value for money” is closely followed and supported by the sector. Thus, the sector emphasizes that these concepts should look beyond the cost aspect for the client and rather look at the qualitative aspect (e.g., what service is provided).

War for talent

The last major challenge I would like to mention is the war for talent and the need for skills. Advancing on the subjects of sustainability, the digital transformation of our businesses, the development of new products or the democratization of alternative asset classes implies innovating and having new skills. Skills development is a key issue. We must, therefore, strengthen the attractiveness of the sector and invest in the current and future workforce. Collaboration with universities and continuing education centers will help.

¹  The companies in which the funds invest are not yet required to report on their degree of sustainability. This obligation will only come into effect in 2024, and then only for large European companies. In 2025, this will be extended to smaller companies. But these obligations apply to European companies and not to US- or emerging market companies in which funds also invest. International rules are being worked on, but it will take some time before they come into effect. The question is also to what extent the European rules will be compatible with the international ones. Fund houses are therefore faced with the major challenge of mapping out the sustainable DNA of their funds in a standardized manner.

² Natasha Cazenave, "Supervisory priorities and challenges for investment managers,
EFAMA Investment Management Forum 2022," presented at the EFAMA Investment Management
Forum, November 18, 2022. 

Conclusion
 

With sustainable finance, we are witnessing a paradigm shift. The challenges, beyond the investments necessary to adapt the systems and implement new operational processing, are particularly related to the lack of data concerning the sustainable performance of investments. Regulatory texts are still being aligned and adopted while technical clarifications are ongoing. However, the industry is already moving forward and is aware of the imperfections and risks. We are at the forefront of a transition that will necessarily involve adjustments.

The asset management industry is built on solid foundations with a broad diversification of investors and AUM. This is not the first challenge that we have gone through. We can be confident about the future.