There’s nothing the On The Regs team likes better than a good industry conference. The first quarter of each year is normally fertile ground for asset management conferences as people meet to reflect on the previous year and debate and predict the months ahead. We’d like to reflect on two recent conferences – one that took place in the Swiss Alps and the other in Paris – that we believe highlight two areas of increasing importance to global asset managers, namely the rise of ESG and the rapid advancement of technology within financial services.
One of the highest profile, most anticipated annual global conferences takes place each January and for the past 50 years has drawn some of the most senior decision makers from around the globe. It is one of the most discussed (in a positive and negative sense) and this year was no different. We are of course referring to The World Economic Forum in Davos.
While we did not attend Davos, we did pay close attention to many of the events and speeches. At Davos, climate change and environmental challenges remained the hot topics as public figures, economists, world leaders, and asset managers spoke of the urgent and vital need to protect the environment and outlined the steps they were taking, or would take, to do this. Technology was another major theme as many referred to the “fourth industrial revolution.” And third, another significant area of focus at Davos, which is becoming increasingly important to asset managers, is the general sustainability and resiliency of the global economy, specifically the changing state of asset management itself.
We were, however, excited to attend Europe’s largest FinTech conference, the 2019 Paris FinTech Forum, where the focus on digital disruption in the banking industry sparked most engagement. As we look ahead, these issues will no doubt come to play in the regulatory arena, as digital disruption and environmental issues reshape the investing landscape. Public policy often drives legislation, which often drives regulation, and ultimately asset management shifts.
Do Well While Doing Good
The closing sessions of Davos are traditionally reserved for a review of economic facts and figures which global economists and policymakers use to make predictions about global growth and financial trends for the coming year. At this year’s meeting, however, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), as is her style, went off script and instead warned the gathered corporate executives, government officials, and media that they each needed to focus less on pure financial issues and more on wider societal concerns like climate change.
“We are going to really focus on risks, opportunities, that are out there,” Lagarde said.
Davos made clear that problems such as climate change are no longer just theoretical but are now tangible and financially critical. If a country’s economy depends heavily on its climate to raise crops, the impact of climate change could be devastating on the country’s entire future economic outlook. This forces asset managers to look at currency and macro investments in an entirely new light. In other words, there is now an ever-increasing direct link between the regulations that affect a country’s health and the business models on which asset managers base their future business models.
Climate regulation an investment factor
Asset managers used to be laser-focused on financial regulations. Now they have to look at climate change regulations, environmental waste regulations, and also regulations that affect people, to really understand where and how different nations will grow and at what speed.
Larry Fink, CEO of BlackRock, whose $7 trillion AUM makes it the largest asset manager in the world, once primarily concerned himself with the limits the SEC put on his funds. But starting last year with his now famous letter to CEOs, he has highlighted how important the environment, social issues, and corporate governance has become to his shareholders.
In his 2019 letter to CEOs, Fink again focused on this theme: “Companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity,” he said.
Many asset managers are beginning to recognize that it’s no longer sufficient to look at a company’s short-term performance when planning investment strategy. Now they have to incorporate factors like climate change that are becoming real. From a regulatory standpoint, they have to widen the scope of their analysis, not only for the purpose of doing their own business, but also to fully understand what will determine the future economic outlook.
We’ll Always Have Paris
This year’s Paris FinTech Forum was fascinating to attend. It involved a fusion of speakers and attendees from both the traditional financial sector and the FinTech community. The event kicked off with a panel discussion featuring Christine Lagarde, wherein she was asked what area of FinTech offers the most opportunity. Her answer: FinTechs’ ability to help end violence against women. The packed auditorium sat in enraptured silence as she provided examples in which FinTech had been leveraged in vulnerable communities to help women. By allowing at-risk individuals to access and protect their money, FinTech created opportunities for independence and financial freedom and, in turn, to escape violence. She spoke of how she has a photo of such a woman on her desk at the IMF.
Another topic on the same panel was the true meaning of a “bank” and therefore, which firms should be regulated like banks. This question is playing out across the globe. There are certain technology firms currently disrupting the existing banking conventions through services like PayPal, WeChat, and ApplePay, but they do so without currently being regulated under the same stringent terms as regulated banks. Does this create an uneven playing field when traditional banks who take deposits and payment platforms fall under different regulation, or certain entities operate without any constraining regulations?
The message in Paris was that appropriate regulation should and will look at what you do, not just who you are. In fact, the US Office of the Comptroller of the Currency (OCC), announced it would begin accepting national bank charter applications from Fintech companies. Under more solid regulatory certainty, entities like Revolut, Google, and Alipay have entered the retail banking fray recently acquiring or applying for regulatory licenses. Given these developments, we may even see more technology firms enter traditionally staid corners of financial services including asset management, investment banking, and asset distribution channels. The world of retail banking and conceivably asset management may never be the same.