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THE NEED TO DEMOCRATISE ESG DATA – BARRIERS TO ESG INVESTING FOR INDIVIDUAL INVESTORS

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Kelly Perry, Director of ESG at Edison Group

 

ESG investing is now firmly in the mainstream and is here to stay. A recent report by a leading US investment bank found that ESG flows into funds increased 102% year-to-date, with November commitments reaching $47 billion compared with an average of $13 billion in 2019, with many anticipating this trend to continue well into next year.

Similarly, in Europe, rising demand for ESG investments drove managers to change the strategy or investment profile of 253 European funds in 2020, helping to push regional assets invested in ESG funds to a record €1.1tn by the end of December.

However, surveys and reports continue to cite investors’ significant fears over the quality and fragmentation of ESG data and say the issue is at the height of their concerns. Assessment has yet to be standardised, dozens of competing metrics are vying for validation and, as investor education continues to progress, many of the data points conceal as much underlying truth as they reveal.

The majority of the relevant ESG information is only reaching a proportion of large institutional investors, which have the resources and teams needed to analyse such complex data on all the stocks they want to consider. This leaves a number of investor groups, such as family offices, and retail investors, being bypassed.

One way to address the issue of lack of consolidation and consistency, is to push for the standardisation of ESG data. The European commission is doing this with the EU Action Plan on Sustainable Finance, which will impose ESG reporting obligations on European companies from 2021. This initiative has been widely accepted by ESG investors across the board, who say one of the main factors in holding back the development of the industry is a lack of consolidation.

As part of the initiative, the sustainable finance disclosure regulation (SFDR) took effect on the 10th March to ensure fund managers, financial advisers and other regulated firms disclose information on various ESG considerations to potential investors, and on their websites. The resulting framework of regulations aims to streamline the criteria financial market participants use to define, measure and report on the sustainability attributes of economic activities.

In a post Brexit world, it should not be assumed that EU Law will no longer apply in the UK and that the SFDR regulations are insignificant to UK-based financial market participants. In July 2019, the UK Government published the “Green Finance Strategy” which highlighted that they would ‘match the ambition’ of the EU’s action plan and their commitment was reiterated again at the end of 2020. Despite detailed initiatives not yet being disclosed, it is key for those operating in the UK to prepare for such or similar regulations to be implemented across our regulatory framework.

However, standardisation of ESG data does not help fix the issue of this information bypassing groups such as family offices and retail investors. While individual investors are expected to increase their allocation to sustainable investments within the next five years, looking at current ESG data may only lead to more confusion. They are either overwhelmed by the masses of unstructured data, or they are drawn into contradictory ESG scores from third parties that make it even more difficult to decide where to invest.

Further to this is the fact that ESG data isn’t provided to individual investors in an easy to digest format. Investors may also be worried about greenwashing and the extent to which the investment offered to them is sustainable, however aren’t provided with the facts in a way that make it easy to understand. In a recent study of individual pension investors, when ESG integration was explained in an accessible way (through a short animation presentation) two-thirds said they would want some or all of their pension to invest using this approach. So, it is clear that the demand for this type of product among individual investors is there, the information just needs to be explained clearly.

Therefore, it is vital that ESG disclosure and ESG ratings / scores are regulated and standardised so that there is no confusion as to how far an ESG tilt goes on a specific investment. For this to happen there needs to be a drive for further regulation that consolidates data and which provides an easy to reference comparison of ESG based investments for retail investors and institutional investors alike.

As a result, Edison launched a new ESG solution, ‘Edison ESG Edge’ reports, which review companies’ ESG current performance and trajectory across the most significant and stringent criteria. The reports have a standardised structure and a ratified, forward-looking data set of drivers and future performance indicators, which will make assessing ESG performance easier and help democratises investors’ access to ESG insight, allowing them to make more informed investment decisions. As ESG establishes itself firmly in the mainstream, it is crucial that all relevant data makes its way to all interested parties, not least retail investors.

 

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HERE’S HOW INSURANCE IS SET TO CHANGE

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By Adam Goldsmith, Insurance Specialist, SAS UK & Ireland

 

Making predictions about the state of any industry in the coming year is a nigh-on impossible task. But looking to the longer-term, the patterns we’re seeing in insurance firms, which have been inspired by the pandemic, have revealed in no uncertain terms that the industry is in flux. Change is here, and its impact will be felt for many years to come.

Woken up by the sharp jolt of the pandemic, insurance will experience dramatic change by 2025. But not all firms will adapt fast enough to the new insurance landscape or new expectations from customers. Those that pay attention to long-term predictions like the following could reap the rewards post-pandemic.

 

1. Knowing customers inside-out through their data will be non-negotiable

A typical Insurer today is set up in very traditional manner. There remains distinct, separate departments for the key functions: including assessing risk, acquisition, customer engagement, claims handling, customer protection and renewal.

Yet very few insurers have a truly joined-up view of a customer’s full journey with their organisation, let alone what can be done to optimise each interaction. What’s needed is the ability to understand each customer touchpoint as they traverse through their journey, as well as the ability to make decisions as to how best to engage them.

Insurers often cite legacy policy admin and claims systems as the biggest barrier standing in the way of this approach being adopted. By 2025, however, the most successful insurers will have broken those barriers down, gaining an unprecedented understanding of their customers’ needs and preferences, and the ability to offer pricing plans that are both fair and competitive.

 

2. Automation and algorithms will become the bedrock of all insurers

We’ve long heard of ‘digital transformation’ being a key objective for insurance executives. However, by 2025 it’s expected that successful insurers will have completed this transformation. Digitalisation will no longer be the differentiator, it will be the default. As a result, a new way to drive business advantage will have to emerge – and it will be centred on the use of algorithms to drive business decisions.

This is not a new concept. Gartner describes ‘algorithmic business’ as the ‘industrialised use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation’.

We’ve already seen some insurers start this journey in their claims function. Companies, including Aviva, have long automated decisions concerning whether a vehicle is deemed a total loss or not. However, the trend will become much more prevalent, with Gartner research predicting that, by 2023, over 33% of large organisations will have analysts practicing decision intelligence, such as decision modelling.

 

3. The customer will see positive change as they interact with their insurer

It’s clear by now that COVID-19 will fundamentally change how insurance is done – both in terms of how customers want to interact with insurers, and also how insurers need to adapt. While we hope this pandemic won’t be with us forever, it has opened the eyes of many executives to what is possible within the customer-facing parts of their organisation.

From my discussions with insurers, many have commented on how well employees and customers have adapted to the new normal. While there were initial logistical hurdles in virtualising contact centres, they’ve been impressed at how well staff have adapted under pressure to deliver what customers and shareholders expect. Many are likely to follow the approach of Lloyds in allowing staff to work remotely for the foreseeable future.

 

4. Prevention will be prioritised over payouts

Insurance has long been society’s safety-net, protecting us when something goes wrong in our lives. Yet, it would be to everyone’s benefit if risk could be avoided altogether. The use of telematics to assess the risk of younger drivers was the first big industry push here, but by 2025 we will see this becoming ubiquitous across many other products and customer demographics.

The recent example of Munich Re’s acquisition of IoT service provider Relayr will benefit manufacturers with a ‘pay as you use’ model. This will enable them to be more flexible and react faster to market changes. The IoT Observatory is also exploring new ways that data extracted from connected sensors and devices can help to transform risk assessment and empower insurers with data.

This is no small step for any traditional insurer. But it is one that puts a truly customer-centric lens on the service that insurers deliver. Data-driven risk prevention allows for significant product differentiation, taking insurers out of their comfort zone and enabling them to explore whole new opportunities.

 

5. Fraud prevention must shape up for a post-pandemic world

Come 2025, we will be living in a very different world with new risks that require novel insurance solutions to resolve.

One of the largest looming threats is insurance fraud. Analysis from the Insurance Fraud Bureau shows that fraudulent claims rose by 5% in 2019, and there are concerns the current economic climate could see this rise even further. In the aftermath of the 2008 Financial Crisis insurance fraud rose by 17%, and there’s no guarantee this won’t happen again on the back of growing practices like crash for cash fraud and ghost broking.

Putting in place an effective defence mechanism to intelligently detect, prevent and investigate potentially fraudulent claims will be an essential requirement by 2025. A soft defence is a liability while those that take fraud detection seriously will drive a more profitable outcome. This is especially true when it was announced recently that close to 20% of each policy premium is goes to cover the cost of fraud.

Insurers must be holding a finger to the wind during this unusual time, as many of the themes and patterns emerging now will shape the industry going forward. Insurers must figure out how to adapt their decision-making processes now, to take on an unpredictable and exciting future in insurance.

 

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VOLATILITY IS CRYPTO’S BEST FRIEND

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Stephen Ehrlich, Co-Founder and CEO at Voyager Digital.

 

Volatility is good for crypto. It serves multiple purposes as the whole crypto ecosystem matures, which we have to remember is an industry and technology that is still only just over a decade old. New and emerging industries are by their nature volatile as they move towards mainstream adoption. But the volatility attracts people, investors and technologists, who drive the pace of adoption forward and as it grows, volatility naturally decreases. In the case of Bitcoin, its volatility has steadily been decreasing over time and even the recent sharp moves have not seen such a big rise in volatility compared to historically (see chart below).

Chart showing Bitcoin Price and Volatility

Source: https://www.buybitcoinworldwide.com/volatility-index/

Volatility continues to attract participants as it is unquestionably in our human nature to be drawn to assets that are subject to rapid price appreciation. Throughout history there have been numerous asset bubbles that have burst, with Dutch tulips of the 1600s being the one that most referenced in relation to crypto-assets. But do tulips really provide any utility apart from looking and smelling good? Many crypto-assets actually provide a purpose, a utility, and serve as the backbone to new technology protocols upon which useful apps are being built. This is why we are seeing greater adoption and as the whole market continues to grow, we are now seeing institutions embrace Bitcoin by diversifying into it as an alternative store of value. This is why volatility is good for crypto. But another harsh reality is that it allows people to learn about the risks, as well as the rewards, of getting involved. Hopefully this is done with the assistance of their chosen broker or through educational webinars, video, and other collateral.

Yes, there will be many that will get their fingers burnt, especially if they employ leverage into their trading without a disciplined approach to managing risk. The same can be said of the internet boom and bust in the late 1990s and early 2000s that saw many a “dotcom” go bust. Leverage was around in those days too, so unfortunately many people learnt the hard way, but it is a necessary evil for the industry to become even more established. For Bitcoin, we have seen multiple bubbles burst, with 2017/18 being the last cycle and soon after the sceptics were suggesting the end for crypto-assets was nigh. But those who see the technology’s potential were keeping their heads down and building amazing platforms and applications. If we take a look at Bitcoin today, it’s clear that the end is nowhere near.

Volatility also attracts the attention of regulatory authorities, another natural evolution of nascent industries. On occasions though, there can be overregulation. Whilst the sentiment behind the UK’s FCA ban on retail investors being able to trade crypto derivatives is right, in respect to trying to provide greater investor protection, it can limit choice and ultimately drive investors to offshore brokers that may afford much less regulatory protections. If an investor really wants to employ leverage in their trading then they’ll find a way to do it, so perhaps rather than an outright ban, perhaps limit the amount of leverage they can use instead.

Bans certainly don’t help liquidity and are actually counterproductive. We’ve seen multiple decisions to “ban” crypto reversed as authorities realise that people simply circumvented it by using a VPN or other means to buy Bitcoin. India is now set to vote on a crypto ban, but at the same time they are due to introduce their own Central Bank Digital Currency, which in itself sends out mixed messages. As governments become more knowledgeable on crypto-assets and understand how they are totally borderless, bans are likely to become less and liquidity will continue to improve further.

Coinbase’s prospectus filing and the fact that the SEC is allowing this anticipated $100b direct listing to come public, with significant consumer involvement, is further acceptance of digital assets by the authorities. The continued evolution of the industry going mainstream and public companies vetted and allowed to move forward by the SEC, foreshadows the long-term outlook by the SEC that this industry is here to stay and regulation and acceptance of digital assets as an asset class is forthcoming. Regulation adds legitimacy to the industry and will attract a broader audience of investors and participants, as oversight gives comfort to a larger group of investors.

Regulation is very important, but it needs to find the balance that protects consumers, yet also fosters adoption of what is a truly ground-breaking technology and asset class. So, for those people that complain about crypto markets being too volatile, we NEED volatility in order for the whole ecosystem to thrive.

 

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