By Amie Keeley
The EU’s new Sustainable Finance Disclosure Regulation has weighed “disproportionately heavily” on boutique asset managers, which have had to integrate new processes with fewer resources than large firms.
Tim Warrington, chairman of the Group of Boutique Asset Managers, a global network of senior executives who run small firms, says boutiques have had to boost their capacity to deal with the new rules, creating increased costs.
SFDR, which was introduced in March, requires firms to sort each fund into a different sustainability category depending on the product's characteristics.
Firms of all sizes have reported a range of challenges implementing the new regulation, which Mr Warrington says is to be expected for any major new piece of legislation.
However, he adds: “It's fair to say that regulation like this always weighs disproportionately heavily for the smaller actors such as boutiques because, inevitably, it will result in an additional layer of processes, additional capacity and therefore cost.”
Mr Warrington, who is also chief executive officer of Norwegian boutique Skagen Funds, says most small firms have focused on the “credibility and integrity” of their investment processes.
“As a result, sustainability is already quite well integrated. What is changing under SFDR is the degree of data and documentation that needs to be provided to verify that, and that makes sense [because] it does weed out the blaggers, as it were.
“It is an additional layer of process and capacity that's required, and we have to hire new people inadvertently to do that.”
In the Nordics, distributors “are setting quite a high bar for SFDR”, according to Mr Warrington, and using it to categorise and exclude certain funds, a trend reported on earlier this year.
A number of senior industry executives have previously warned that different interpretations of SFDR among member states could lead to greenwashing.
Mr Warrington says some firms are likely to be “caught out” when regulators start enforcing the rules next year.
“There are going to be a few stories in the media where people are caught out on their processes and found to be not fit for purpose, and everybody will adjust from that and then it will settle down [...].
“I think there'll be a little bit of manoeuvering through next year and then by the end of next year, I would expect us to have a common understanding of what SFDR means and across the European jurisdiction.”
The UK intends to introduce its own regime and published a consultation last month.
The UK’s Sustainability Disclosure Requirements will mirror that of the EU’s SFDR, but the UK will classify funds according to levels of sustainability rather than giving them a numerical categorisation.
Regulatory experts have said this could prove problematic for cross-border firms.
However, Mr Warrington downplays the impact of any divergence between the EU and the UK.
“It only becomes an issue if it is a massively different regime that is asking very different things or directing products to go in very different directions. Then it starts to get a great deal more expensive, because you have to create bespoke solutions for individual markets.
“I suspect that probably won't happen. The UK has always been fairly well aligned.”
He is also optimistic that challenges around ESG data will be resolved.
Asset managers have come under strain from the volume and inconsistency of environmental, social, and governance data following the surge in interest towards sustainable investing.
“The data will catch up, because I think the speed with which the industry sees an opportunity to develop new services and new products [...] that's one thing financial services is pretty good at, so somebody will fill those holes.”
Meanwhile boutiques are benefitting from the shift from passive to active strategies.
“The majority of boutiques are active managers and for some time that has been the challenge of passive investing, [but] we're seeing that that pendulum is starting to swing back somewhat,” says Mr Warrington.
“We're seeing more interest, not just from consumers, but also from professional investors, institutions [...] to take a look again at active managers and boutique products.”
He adds: “I think that that will continue, particularly if we started to experience some of the unfamiliar effects of inflation.” Boutiques are also seeing a boom in recruitment.
Ignites Europe reported in November that portfolio managers at large firms were increasingly considering a switch to smaller firms as a result of the pandemic.
Mr Warrington says he too is witnessing “a lot of interest from people who want to make a change”.
“I have had enquiries from people in the UK saying ‘I was thinking of moving to Norway, I work in financial services, are there opportunities? Would you be able to provide any advice [...]?’
“[Boutiques have] a different kind of working environment than a very large organisation and I think for people post pandemic that is an increasingly attractive way to live and work.
“It is a trend that is generally to the benefit of boutiques [...].”