ESG interest takes center stage

Despite investors and pension fund members wanting to know more about the environmental, social and governance (ESG) standards of the companies they invest in, exactly how this should be disclosed has remained somewhat unclear across both the US and Europe.

But in March of this year, the European Parliament and EU countries provided some clarity on sustainable investment disclosure rules for institutional investors. As reported by Pensions & Investments, an agreement was struck as part of the EU’s broader Sustainable Action Plan that will see money managers, insurance companies, pension funds and investment advisers required to integrate ESG factors into their portfolios, and consistently disclose how they invest.

Information about any adverse impact of investments, including assets that pollute water or damage biodiversity, must also be disclosed. In the US, guidance for the financial sector remains opaque after Congress in July rejected a move to introduce similar rules locally.

In a further move, ESMA in April issued a final report outlining technical advice to the European Commission on integrating sustainability risks and factors in MiFID II. In the report, ESMA commented that the changes – which are at this time proposed – will provide “clarity on the fact that existing MiFID II duties will require firms to assess ESG factors and to take them into account when serving their clients.” We at Confluence will await further detail on what this means for the types of information that financial market participants will need to provide.

Reporting for entirely new asset classes

As digital assets like cryptocurrencies, including Bitcoin and others, emerge from a challenging 2018 marked by heavy losses, regulators are still grappling with how best to oversee the sector. The work-in-progress nature of regulation has been a deterrent the many institutional investors who are gun shy about diving in without the backing of guidelines or laws.

At the same time details of Libra were revealed, a proposed global digital asset payments system and token backed by a basket of fiat currencies. With a 2020 launch date planned, the social media platform’s more than 2 billion users will be able to shop or transfer money, with nearly zero fees, using digital wallets provided by Facebook. This move will no doubt also grab the attention of regulators and lawmakers alike.

In Asia, Hong Kong’s Securities and Futures Commission (SFC) recently introduced a new regulatory framework for exchanges in a move to tighten up the crypto space. Under the proposed scheme, crypto exchanges will be able to deal only with institutional investors, not retail investors, as part of a move to better protect the public. The Securities and Exchange Commission is still determining the appropriate level of oversight in the US. Concerns remain that over-regulation could stifle innovation, but on the flip side, fears of money laundering and custodial risk drive regulators toward more supervision. The conversation continues.

While institutional investors have been reluctant to dip their toes into the digital asset space due to regulatory uncertainty, investors are becoming more comfortable with the growing asset class as more institutional-grade custody systems become available. Indeed recent research from Fidelity Investments found that four in 10 respondents were open to future investments in digital assets over the next five years, in a sign that the lines between investments, traditional currencies, and hedge funds are continuing to blur.

As these divisions continue to overlap, regulators will no doubt be looking at ways to ensure that investors’ interests always remain paramount. With the financial crisis in the rearview mirror, but not forgotten, new regulatory reporting is sure to emerge in the fight to prevent a similar event from occurring.

This is Part 2 of a two-part article. Part 1 can be found here.