By Jonas Borglin, CEO, The New Division
In September 2019 more than 45 CEO’s together with the UN Secretary-General launched the Principles for Responsible Banking. Already incorporating more than 130 banks from 49 countries, representing more than $47 trillion in assets,these Principles aim to provide the framework for a sustainable banking system, and help the industry to demonstrate how it makes a positive contribution to society.
It is the latest step forward by a finance sector that is rapidly gaining awareness of firstly how capital can be a driver for sustainable transformation, and secondly of how making more sustainable investments can be a significant source of competitive advantage for their funds.
Portfolio performance and investor demand
Partly this is an issue of portfolio performance,Fund managers need to mitigate the risk of being left with an investment that falls foul of increasingly stringent laws around environmental impact, supply chain conditions, performance in sustainability areas, and so on. However, for most the calculation ought to be around the greater value that investments in sustainable projects and organisations are likely to yield.
Recent research from Morningstar examined the net return of funds domiciled in Europe to see if this theory holds true in practice. It found that more than 34 per cent of sustainable funds appeared in the top quartile of their category in the year to June and about 63 per cent made it into the top half.
For retail funds an even greater impetus comes not from portfolio performance, but from investor demand. According to the recent EY report ‘Sustainable Investing: The Millennial Investor’, the value of assets under management in funds that focus on sustainability as a key selection criterion has grown annually by 107.4% since 2012. With millennials set to inherit more than $30 trillion, sustainable investments will continue to grow in demand.
This is a market opportunity that few fund managers can afford to ignore. Furthermore, developments at the highest level of government are making action in this area increasingly visible and are therefore hard for funds to avoid.
European transparency and the Asian transformation
In March 2018 the EU Commission launched its Sustainable Finance Action Plan which has since led to the creation of an EU taxonomy for sustainable activities, which will provide increasing consensus on whether an economic activity is to be classified as environmentally sustainable.It also created the EU Green Bond Standard which will encourage market participants to issue and invest in EU green bonds. Finally, the EU Climate Benchmarks will enhance disclosure requirements, and so make benchmarking information more transparent and comparable.
It will not be long before funds that continue to ignore these issues are rejected by investors, and investments that have neglected these issues lose their value. Already this happening, most notably in the infrastructure investment in Asia.
Population growth and increasing urbanisation in Asia will require between $20tn and $30tn in infrastructure investment over the next 15 years. Perhaps in recognition of the fact that around 70 of the 100 most polluted cities in the world are in Asia, the Asian Infrastructure Investment Bank has a mandate to screen its bond investments based on ESG investment principles.
There is a final driver here: a focus on sustainability will make the financial services industry better at making decisions.Today many investment managers look at annual reports to understand risk, but when it comes to sustainability strategies, technologies, opinions, impacts, and possibilities the move is so rapid that this retrospective look is rendered largely irrelevant. What an organisation has done in the past to mitigate its environmental impact is no real indication of what it will do in the future.
Thisis a significant shift in mindset for fund managers. The decision is not which of a range of possible investments can demonstrate the best track record in sustainability; it is which has the potential for the greatest impact through transformation. This is not about investing in green businesses, it is to a large extent about picking brown business that can change and then exerting influence to encourage that change and create positive impact.
This will involve fund managers building their skills at asking questions and spotting which actions will ensure sustainability becomes a source of competitive advantage rather than a risk. Importantly, losing the dependence on historical report aggregators, and developing their questioning skills will bear fruit far beyond the sustainability agenda.
Sustainability is no longer a marginal interest; it is right at the core of some of the most significant investment decisions in the world. And there is a growing number of funds that can point to a strong sustainability position and impressive returns.
Look at start-up Trine, which is really gaining momentum thanks to its sustainable approach. It is giving clients opportunities to invest directly into solar energy projects in developing countries. OrSPP where a certain percentage of each fund is invested in renewable energy.
Then there is Summa Equity that invests to solve global challenges using the UN Global Goals as its compass, both as investment strategy but also for impact measures.These and others are all giving sustainability values the same priority and attention as financial values. Sustainability is part of core business in the investment portfolios.
For funds that are keen to emulate this success, the time to act is now. This is a risk averse sector, and the idea of looking at a triple bottom line is still new, but there is no longer any time to wait and see. The pressure is on from customers, policy makers and other stakeholders to act. Furthermore, if the traditional players in this sector don’t act then new fintech rivals will – and will start taking market share.
Beyond, that, as you pivot, your investment strategy, communicate what you are doing. A growing number of organisations are tying their investment strategies to an international agenda such as the UN Global Goals. These enhance the strategy and deliver more widespread recognition.
However you do it, find a way to present what you are doing on these complex issues in a way that is simple and engaging, it will attract support and investment. Not only will your position on sustainability become a source of competitive advantage, but your capital investments will be driving a positive transformation in the world.
Seven lessons from 2020
Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President
Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?
Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.
As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.
So, what are the main lessons from 2020?
- Humans are enormously adaptive. This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.
- No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.
- Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.
- Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.
- There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.
- Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.
- Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
Data after Brexit: How does the end of the transition affect GDPR?
By John Flynn, Principal Security Consultant at Conosco
The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.
Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.
The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.
We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:
1 – Update your privacy notice
Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.
The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.
This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers. The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.
2 – Data privacy assessments
Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.
For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.
3 – Review local legislation
Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.
4 – Cyber Security health check
The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.
A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.
It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.
It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.
2020 reflections and 2021 outlook
By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man
Reflections on the most surreal year
The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.
The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.
The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.
Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.
Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.
Looking ahead to the future
We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.
The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.
The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.
Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”
We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.
No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.
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