By Hans-Joachim Lefeld, Partner ESG Consulting at LPA
It’s been a record year for the cryptocurrency and digital assets market. For the wealth management industry, many of the most established players have yet to invest in these assets thus far. However, with the frenzy around crypto accelerating, the subject is becoming increasingly difficult to ignore, with conversations building on whether to consider crypto assets as investable.
More financial institutions are beginning to explore how they could capitalise on the attention that cryptocurrencies are attracting. But, incorporating digital assets into one’s portfolio won’t be without scrutiny, particularly regarding the sustainability element of such an investment. So, questions arise of whether investors should let the environmental concerns hinder an investment into the cryptocurrency and digital assets market.
The sustainability forecast for crypto
Despite recent initiatives by both governments and central banks to transition cryptocurrencies into a more mainstream financial ecosystem, so far, the global crypto landscape has largely maintained its complexity and focus on technology rather than sustainability. Meanwhile, the whole ESG arena and related products carrying these labels and sustainability ratings are finding themselves under increased regulatory scrutiny, as seen with the recent US Securities and Exchange Commissions (‘SEC’) thematical attention of investment advisors and funds focussing on portfolio management, advertising and marketing of fund performance and compliance programs.
At an international level there is also the International Organization of Securities Commissions (‘IOSCO’) call for oversight of applicable to ESG Ratings and Data Product providers. IOSCO’s regulatory recommendations are aimed at increasing ESG rating methodology transparency, active management of inherent conflict of interests, and improving communication between providers and entities covered without undermining impartiality. As previously seen with IOSCO’s attention on credit ratings, this call will likely trigger further targeted actions by national regulatory authorities. These are all clear signs that ESG is o the global regulatory radar.
In contrast, however, global financial regulators are still relatively trailing behind in their ability to understand, and hence regulate, the intricacies of the crypto market in general and use of crypto currencies within an ESG-themed context in particular. This will change over the next few years but there seems to be an industry consensus that it will take a good five to ten years at least for regulators to catch up. Until this happens, crypto still needs to be considered either an unregulated or grey market that comes with greater risk both in terms of direct investment risk and reputational issues when expanding portfolio coverage into those more esoteric asset classes.
How to meet the appetite for crypto
Undoubtedly, investors are increasingly focusing on ESG, although to date this mostly meant a focus on the environmental impact. This paradigm shift has been leading to greater scrutiny of sustainable investment asset classes, as well as a recognition that marketing- or sales-oriented use of ESG ratings may often hide elements of greenwashing. How much of this the regulators will eventually consider to be mis-selling, not dissimilar to the PPI scandal, remains to be seen.
In contrast, great technological strides have been made in the sustainable cryptocurrency space and as a direct result of investors’ pressure, we have seen an advent of more energy-efficient and eco-friendlier crypto providers. Some examples of new and more sustainable approaches include:
- Technical and cryptographical efficiency improvements thereby lowering the currencies carbon footprint, such as Tron, Cardano and Stellar.
- Specific incentivisation of sustainable methods and corporations, such as Solarcoins.
- Focus on impacting environmentally benevolent policy changes, such as BitGreen.
- The usage of probabilistic consensus mechanisms, such as IOTA.
- Low latency or low energy consumption algorithms, such as Ripple’s RPCA.
Whilst the E-factor of ESG is well understood, both the S- and G- factors are still somewhat underappreciated. Yet crypto currencies and their use as an alternative retail “investment” instrument may also have socio-economic implications, particularly when treated as vehicle to making “quick bucks” that somewhat fuel betting behaviours or gambling addictions. As highlighted by the UK’s Financial Conduct Authority (FCA) temporary registration regime for cryptoasset business, both shortfalls in corporate assets as well as the highly speculative nature of crypto assets can ultimately lead to huge losses consumers.
Consequently, traditional investment strategies and analytical approaches need to be adjusted to cater for the somewhat less quantifiable and more longevity-focussed soft factors that represent ESG. With the right balance and out-of-the-box thinking, investors can still reap huge rewards if they are willing to go the extra mile and, maybe more importantly, are happy to accept the huge risks that comes with crypto assets.
Sustainable-conscious investors remain sceptical
Sustainable-conscious crypto investors need to expand the more traditional investment process and relevant due diligence to include emerging ESG approaches as part of their analysis. This also means not accepting the face value of ESG scores and develop an in-house appreciation of some of the asset-class specific issues highlighted in this article.
For instance, external tools and analysis such as the Cambridge Bitcoin Electricity Consumption Index, may help to augment the more traditional investment analysis with assessing the environmental impact of their investments. Additional thinking is then needed concerning the societal impacts and corporate governance of suitable candidates.
Building up this experience will take time and will likely require additional resources and often also valuable bought-in expertise. Consequently, if done properly, this should not just represent a mere dabbling into crypto just for the sake of looking attractive and not dissimilar to venturing into the ESG investment space just for the sake of looking green.
Ideally, it needs to become part of investors’ or asset managers’ overall investment strategy and risk appetite setting process, meaning an understanding and appreciation of crypto assets’ features needs to become formally embedded into the investors’ own investment and asset management process.
In return, the benefits of a more structured and thought-through approach can be hugely rewarding for investors, family offices and asset managers alike. It will help them to develop a sense of empowerment leading both to more grounded and well-researched investment decisions, as well as more impactful investments. Thereby they are not just pure consumers of ESG assets, they partake in the whole process by becoming producers of more sustainable investment returns as well as shaping the future market for this asset class. And that’s a win-win for both them and all of us.
Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study
Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute
Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.
The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.
Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.
THE RISE OF ESG
ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.
The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.
There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.
What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.
TECHNOLOGY MULTIPLIES TRUST
Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.
The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.
It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.
THE PULL OF PERSONALISATION
How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.
Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.
So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).
When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.
TRUST IN THE FUTURE
As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.
The customer expectations driving insurance change
Carl Strempel, CFO and co-founder, Imburse
Customer expectations are continuously evolving, with simplicity and speed a significant priority in the current market. These expectations have been driven primarily by well-executed technology advancements in eCommerce. For example, many eCommerce platforms allow for instant payment and transparent tracking and delivery. Customers also have the option of availing of a chatbot, allowing for problems and issues to be solved quicker than relying on telephone customer support.
The best examples of these customer engagement solutions are integrated across multiple channels so that customers can switch from the chat-bot to a phone call to an email seamlessly, with the context and conversation retained. Companies and providers understand that there is nothing more frustrating for customers than having to explain the issue multiple times to multiple service representatives.
Customer expectations are continuously changing as mobile technology continues to make advancements. The growing prevalence of super apps that can do it all, from booking food deliveries to ordering taxis, is massively impacting customer expectations. These enhanced offerings mean that individuals are now also expecting this level of detail and personalisation from banks and insurers. Whether buying personal insurance for yourself or your family, or a CFO or risk manager purchasing commercial insurance for a business, customer expectations are rising. There is no longer an excuse for insurers to deliver a poor customer experience.
Insurers, especially in the retail and SME business, have scrambled to overhaul their customer experiences to meet modern consumers’ demands. For example, if an insurance company cannot turn around a quote for a comparison website within a few seconds, they won’t win any business. In fact, if they are not in the top three quotes with a competitive price, they are most likely irrelevant.
As a result, insurers need to think about their technology stack and how they can deliver the best possible experiences for their customers, to generate sales and improve retention. In this case, real-time API integrations into comparison websites.
Other areas of innovation are the ongoing migration to the cloud, which allows for the building of scalability and resilience in insurance carriers, as well as enabling technologies such as document ingestion, workflow automation, A.I., and payments technology delivering a better customer experience with a reduced Total Cost of Ownership for the enterprise.
First and foremost, insurance companies need to understand their customers and how they expect insurance interactions to be delivered. Following this, a technology strategy must be formed to enable them to deliver in an agile way. Being agile is significant because customers’ expectations evolve over time, and technology also changes. As a result, insurers need to understand their customers and be able to deploy relevant technologies in an appropriate time frame to meet demands.
Many insurance providers partner with innovative technology companies to deliver solutions that will support the needs of the end customer. By offering relevant payment checkout experiences, similar to those by large eCommerce platforms, insurers can increase their top line and keep more customers satisfied. Insurers can further reduce payment site costs by using external partners to manage integrations with the global payment ecosystem. This makes the configuration of payments more cost-effective and quicker than what existing IT integrations allow for. This technology can deliver a 90 percent saving on payment integration and configuration.
The advantages of technology in the insurance industry are clear. Technology enables insurers to improve coverage for customers, enhance customer experience, reduce costs and improve product-market fit. There are several new insurance business models being deployed, including embedded insurance, parametric insurance, and soon “open insurance,” which are all designed to make the customer experience more seamless and provide the right cover at the right time. When deployed in the right way, technology is a critical enabler for insurers to deliver to their customers and avoid becoming irrelevant capacity providers.
There are numerous opportunities for insurers to embrace innovation in the industry. The challenges with enterprise payments, however, are primarily transforming traditional IT systems, and maintaining multiple IT integrations with different payment technologies and providers. The impact is not only on top-line income and bottom-line costs, but inadequate payment capability also inhibits insurance innovation. Payments need to meet the needs of the modern consumer and the insurance product. These are the barriers preventing insurers from pursuing their digital transformation journeys. It is for these reasons that third-party innovative solutions prove valuable, enabling insurers to completely optimise their payment systems, for a fraction of the cost, resources, and time.
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