BITA Risk’s study this summer on the current challenges for wealth managers in portfolio governance and management has revealed 5 key areas needing action: TCFD, ESG, Consumer Duty, Central Investment Plans and Risk.
In the first of a series of short reviews of these topics we look at TCFD reporting, and the key challenges and opportunities that this brings.
TCFD (Taskforce on Climate-related Financial Disclosure) reporting will require investment management firms, including most wealth managers to be able to report at entity, product, and portfolio level on key carbon metrics, both on a current portfolio and its history.
The FCA has made it clear that they expect a firm to consider making this reporting available on demand to all clients in due course, but there is an immediate need to address the collection of data to support future historic reporting. Some firms already have the processes in place to be collecting this from the start of January.
A key challenge is data quality and availability of data, and this is made transparent through reporting the coverage and quality of data for each asset group. In some cases, proxies can be used systematically, and these then replaced as coverage improves. This will certainly focus attention on the data vendors to increase coverage and quality.
The foundation of TCFD reporting by wealth managers has to be a systematic approach that utilises structured data. While Excel aggregations and manual aggregation of data may work as an interim measure, these inefficient and time intensive processes will soon be overwhelmed.
Working to support firms in this area, we suggest building a data history across the 100 plus key metrics for portfolios, with sufficient granularity to enable easy aggregation, interrogation, and reporting. In this way, the year on year and longer-term historic reporting is quick, efficient, and consistent.
In discussions with firms, we found that often their data comes from one or more vendors, and they may then apply their own overlay. This creates the challenge of a single portfolio view that manages and collates these data sources, something we have already solved.
So, this admirable drive to net zero requires considerable data, married to every portfolio. A huge challenge in itself, but once the right approach is taken, there can be significant beneficial spin-offs in both client engagement and investment risk management.
With the right approach, meeting the regulatory needs of reporting can deliver further immediate benefits:
- Demonstrable trend of carbon exposure across the firm and for a client
- Identification of climate related risks at portfolio and asset level and joining up data for the investment manager
- Business intelligence to support a firm’s carbon strategy whether majoring on sustainability or focussing on meeting the regulations.
- Improving the Client experience, showing your firm as ahead of the curve, treating climate change not as a regulatory requirement, but a risk management exercise and something for the good of all.
With Consumer duty requirements fast approaching, one should consider the carbon metrics reported under TCFD as a key foreseeable harm which needs to be identified and addressed. This includes identifying potentially stranded assets and those with a high Climate VaR.
As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180bn of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for TCFD, together with significant added benefits for the firm, following the IA (Investment Association) template as a base and then adding analysis and client facing interpretations.
If you would like to discuss the points raised, please message us at BITARisk@corfinancialgroup.com
In the next two reviews we will look at the monitoring of ESG and Ethical Restrictions and then Consumer Duty. Sign-up here to receive these directly.
Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group