A month has passed since I had the chance to attend this year’s FundForum International in Copenhagen. Taking time to reflect on this, as usual, it was a well turned out event attracting senior executives from around the world. The trending topic was ESG (Environment, Social and Governance) and the drive to incorporate it into mainstream strategy, partly due to the impact of millennial customers and catering to their needs and the development of the experience economy.
Mark Carney, Governor of the Bank of England, recently told banks and investment managers they can’t ignore the effects of climate change. Perhaps no one would have ever thought banks should take this seriously. However, regulators and investors are taking note. Stats that were presented during the event showed client funds flowing into sustainable investments are growing 107.4% annually since 2012. This currently accounts for 18% of AUM in the wealth and asset management industry.
There are several reasons why this is happening?
1. ESG assets are believed to perform better than traditional securities;
2. Institutional investors don’t look favourably on companies that have poor ESG related revenue – carbon emissions, unsustainable and social practices and fossil fuel consumption.
3. Regulators are driving for adoption – in the EU the Action Plan on Sustainable Finance will introduce new rules for institutions that invest in ESG assets. The European Commission (EU) is currently drafting a comprehensive set of standards to provide a benchmark on sustainability to help asset managers whilst we were told in another session the Financial Stability Board’s (FSB) taskforce on climate related financial disclosures has also had an impact on marketwide transparency for ESG.
4. The impact of changing demographics – both customers and employees stem from the millennial generation. If the industry is going to effectively and efficiently compete, it’s essential that these digital natives, with their experience-led attitude to life, are considered at every stage. Solutions and services must be tailored to their needs and ethics.
What can institutions do to compete effectively and overcome these challenges?
To start with, they need to mobilize their workforce and capitalize on digital technology to develop sustainable investment products. In the US the current average age of investors is 63 – it’s expected over the next 30 to 40 years in the US alone an estimated $30 trillion will change hands (The Future of Wealth Management – Accenture, 2018). The industry needs to be prepared for that.
These career-minded, tech-savvy potential clients will account for almost three-quarters of all income by 2025/2026. 84% of millennials say social opinions influence their purchase decisions. Aside from requiring traditional firms to up their social media presence and strategy – sustainability is key in this customer segment. Companies like Kiva are disrupting the broker model by allowing investors focused on sustainability, to invest directly in small- and medium-sized enterprises that support the wider social responsibility. Investors feel like they are directly helping to start new businesses and grow the economy for the better.
Technology unlocks a financial institution’s ability to build sustainable business models, drive innovation and keep customers happy. It helps companies stay relevant, regulatory compliant and shrug off the image of being outdated and boring in order to attract the workforce of the future. Technology will help attract this millennial and generation Z employee talent pool who will then drive competitive advantage into the future. According to KPMG, this is particularly true in financial services which is seeing a narrowing of the talent pool and millennials considering banking to be ‘boring’ (KPMG survey press release). Technology changes that.
Other industries are leading way, proving that digitalization is critical to optimizing business operations and strengthening customer services. They’re even using 3D modeling to simulate a digital twin. In this way, management teams can strengthen their business models, reduce operational risk and attract the workforce of the future by leveraging the power of technology.
For example, Dassault Systèmes’ Virtual Singapore Project, a 3D twin of the city, allows stakeholders to experience and interact with the virtual city so they can understand firsthand how it works and evaluate how it can be improved. Those very same principles can be applied to any organization using a virtual representation of itself on the 3DEXPERIENCE platform.
Digitalization helps manage the data so management decisions are based on fact. We’ve all experienced the HiPPO – highest paid person’s opinion – in the room. It’s just poor business practice for managers to ignore data in favour of making decisions solely based on what he/she – the HiPPO wants done.
So, the upshot of this year’s focus at FundForum is that if you wish to gain a customer or an employee, it’s about really understanding their needs. Secondly, in the age of digital transformation and the experience economy, using analytics and customer insights, the industry can focus on co-creation (also known as ‘collaborative innovation’) turning concepts and strategy into reality with digitized sustainable business models deliver what it knows the customer wants and needs – all in a regulatory compliant environment.
To find out more visit https://ifwe.3ds.com/business-services