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The Next Chapter: Asia's Asset Management Industry
This series of podcasts has been put together to mark our 40th anniversary in the Asia-Pacific region. Throughout the series, we explore various facets of institutional investment and discuss what the next chapter might hold for different types of investors with subject matter experts from across the region.
The Future of ESG
Whatever our individual perspectives of ESG may be, we all would agree that it is a complex subject.
In our latest podcast, our experts Kevin Hardy, Head of South East Asia and Anna Bernasek, Global Head of Thought Leadership dive into the findings of our Future of ESG report and explore how this relates to Institutional Investors in Asia Pacific. The report looks at what ESG means in practice, some of the key developments we expect to see over the next 12 to 18 months, and how we see the solutions space evolve to address ongoing ESG challenges.
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- Ric [00:00:02] Welcome to another edition of our podcast series celebrating State Street's 40th anniversary in Asia Pacific. In this series, we explore how institutional investment in the region has evolved over the decades, and we look ahead at what the next chapter might hold for different types of investors. I'm Ric Shadforth, Head of International Marketing at State Street and today we're talking about ESG and in particular, the future of ESG, which is the title of a new report that State Street has just published. That report looks at what ESG means in practice, what might drive its development over the next 12 to 18 months, and what some of the solutions could be to the ongoing ESG challenges that we face. I'm joined today by one of the co-authors of that report Anna Bernasek, our Global Head of Thought Leadership and also to give us more of a regional perspective. Kevin Hardy, State Street's Head of South East Asia. Thanks both for joining me.
- So, ESG is certainly a hot topic at the moment, particularly in the finance industry, but it's also very complex and it's sometimes a bit controversial. In fact, you could perhaps say that beyond the definition of the letters, environmental, social and governance, it can be tough to get much agreement in the ESG space at all. So Anna, tell us a bit about this report and in particular, what did you want to achieve by writing it?
- Anna [00:01:16] Ric that's exactly right, exactly what you said, you know, getting agreement and even talking the same language. I mean, we all know what ESG kind of mean but what does ESG mean in practice and what does it mean if you're an asset manager? What does it mean if you're a policymaker? What does it mean if you're a public company? It means different things to different people in finance. So that's exactly why we wrote this report. Essentially what we did was get the best minds at State Street together on this topic. We sat down; we talked about it across the organization. We talked about it with our partners outside of the organization, and we did a bunch of research and we sort of distilled that knowledge into this report so that's the basic outline of what we did.
- Ric [00:02:31] And it's a pretty big report I was having a read through it, we can't get through everything on this podcast but what were some of the top line findings?
- Anna [00:02:38] Okay, so basically the number one finding really is to say, okay, what is ESG in practice? You know, you hear ESG is this and that and whatever. What we say is ESG connects those parts of the world on which we've not yet placed any explicit value. Things like clean air, fresh water, healthy and supportive social fabric with the financial economy. So it's really about valuation and it's a bigger and more accurate picture of value creation. So that's number one that's what ESG is in practice. Number two, ESG is really all about responding to market demand, and it's demand coming from investors, which is really where ESG started, but it's also demand coming from consumers and the global workplace. So those are the two, I would say key things but then there are other findings like, you know, the scope of ESG is constantly evolving as we kind of all have this conversation about what it is and where it's going. We were all kind of trying to understand the scope of it. So it's changing from climate and the whole sort of environment and climate change to the social aspect to governance.
- Ric [00:04:22] Kevin, if I sort of throw it to you here, so I mean, ESG, I think generally is accepted, it started out of Europe but Anna talked about that demand and we're certainly seeing demand for this from all over the world now. What are you seeing in the APAC region and how is that demand manifesting itself here?
- Speaker 3 [00:04:39] Yes, it's fair to say that the ESG topic or ESG investing is growing across all regions. The difference, I think, is with respect to the sentiment. By that I mean the adoption and the practices within the investment community across Asia Pacific. It takes a slightly different course versus that within the West. But let me maybe give you a few examples. Within the developing world, there's been, I guess, a drive to make substantial investments to help finance the transition to green economies, and particularly the split between fossil fuels and agricultural sectors. It's much the same within Asia Pacific and I'll give some color around that a bit later. Without these funds, however, the transition will be super slow and very painful. So these developing nations will not reach their goals in the proposed timeframes if the funding does not take place. So it's very clear there's a link between the funding that is required and the change that we're all talking about. So this necessitates a degree of funding coming out from the investment community be they asset managers or asset owners, and we look in particularly at the asset owner community for help to drive some of this change because that's where a lot of the funding will come from. Whether the changes are with respect to new technologies, whether it's the financial support to help make these polluting and extractive industries more environmentally friendly - that capital will be required. There is, however, some recognition that the greening of the economy into a cleaner state may increase carbon emissions in the short-term. Find this somewhat counterproductive? But by this we mean that investing in projects that will make an impact may actually mean buying some of these dirty old brown companies and transitioning them to green. A great example from within Asia Pacific is palm oil. So palm oil is the single largest contributor to deforestation and pollution across Asia Pacific, notably within South East Asia. And those who have lived in Singapore for many years have felt firsthand the impact of some of that deforestation as some of the palm oil plantations are burnt. So it's very well understood within South East Asia but we realise that the use of palm oil is incredibly versatile and used in a myriad of products be it within food or health care, detergent, cosmetics and biofuels. So a lot of people don't even realise it's in the products that they use today. But if you look at the ingredients, you'll see very clearly palm oil is there. So 85% of the world's production comes from just two countries, Indonesia and Malaysia, and only 20% of palm oil production is from certified sustainable sources. So we're on a transition, but we're not quite there yet. And this is despite the comments made from several global corporations to commit to use sustainably produced oil. So we're on a journey, we haven't quite got to where we want to go. We need to move a little faster. Sustainable oil sometimes is criticized because it is more expensive than conventional oil, but as with all things, the more use, the more demand you'll find that price disparity should shrink. So again, we need to see many of these corporations who have made this commitment to actually do it, to push ahead, and that will shrink the pricing effectively to a point where there is no difference - so you might as well move forward with your sustainable palm oil production. Importantly, money flowing into sustainable production should have a positive impact within the environment. So again, you look at the link between ESG and where the money flows and the actual impact of that money. We hope to see more if there is more money put to work. But of course, and I think, as Anna mentioned, we can't ignore the challenge between the environment and the social conundrum. So across the region, we see different priorities between environmental and social factors and that's maybe a slightly different argument when we look at Asia Pacific, which has a high degree of emerging economies versus the West, which is principally developed today. So this is quite a bit of a difference. So whilst we transition and again we'll use palm oil production as an example, eliminating deforestation sounds pretty amazing, but it may mean putting thousands of people out of work. Within palm oil however, it's hopefully people are retrained to do things slightly different. The organizations use different technologies in order to gain the same outcome. But palm oil is maybe slightly different to things like energy because palm oil uses a lot of manual labor. And I think even going forward there'll be a lot of manual labor, even as automation may step in, but things like mining and energy, where skilled individuals are required will be a little tougher. And so the impact with respect to the S is likely to be far greater. So whilst in the West, E continues to be the main focus again because they're further down the line in terms of development, within Asia Pacific, it's slightly different. The S is maybe a slightly higher priority. And so we see a number of asset owners looking at the data that they have available and recalculating their own scores, but maybe pushing a slightly higher weighting towards S as they go through that transition. And I'll give you one really good example in a conversation I had with a prospect in region whose economy is driven by some of these extractive components, fuel. And we spoke to them about ESG, and they made very clear from their perspective that this is a journey and they're at the earlier stage of that journey. And so for them, whilst it's absolutely incredible that everyone wants to look at some of these fossil fuels and transition into renewable energy, but the impact that could have on their economy from an S perspective would be huge. And so their focus, whether it's through dollars or even investing in those local communities, is around the S component. So that really brings home a big difference between the East and the West when we look at the topic of ESG.
- Ric [00:10:17] So certainly complex topics that we're discussing here, as we said at the outset, no sort of simple answers to these. Anna, another area that has proved quite complex and controversial is around that sort of measuring and accounting and getting consistency on data and analytics and valuations in ESG. So can you talk to me a little bit about what are you seeing in the ESG solutions marketplace and how is that evolving over time?
- Anna [00:10:41] So Ric, the solution space, it really is about data and it's about analytics and research. So when you think about ESG being that valuing things that we haven't yet put a financial value on, so when you're talking about it in those terms, then data analytics and research are key. So the better the data, the better the analytics, the better the ESG is. Everything right now in terms of the market solutions space, the commercial solutions space as well as I would say the non-market, which would be the standards and also the regulatory push is about that data, analytics and disclosure. So that's really sort of the key area for ESG. But then what we're seeing too is - and if we just look at the commercial space, right, the market solution space, then we're seeing things like investment products and services, we're seeing scores and ratings and indices. We're seeing sort of regulatory reporting and compliance and all that kind of stuff. And we're seeing a bunch of advisory and consulting services spring up. So we're seeing a bunch of solutions right now, and it's only going to get better and better as people recognise that this is a response to demand. And you know, what finance does really well is respond to demand. So we're just going to see it sort of grow and grow and grow.
- Ric [00:12:28] Kevin, how do you see that playing out in APAC, Anna talked about those changes in demand, as you look ahead to the medium or longer-term, what trends do you think are going to impact your clients?
- Kevin [00:12:38] I love the comment response to demand and you'll hear that quite often because it is a truism within financial services. We do respond very well to demand. But to your specific question, I should probably say where do I start? And then Anna may say, when will he stop because there are so many topics involved within this, I will try and limit it to two. So first up - until now, many ESG initiatives have really coalesced around a number of like topics climate change, diversity, corporate governance and so on. But recently we've seen a number of new risks emerge. And you flip on the TV today and there are countless - geopolitics, war, energy and food security, weather, the list is endless. So it's forced ESG investors and companies to rethink some of their long held assumptions around where are they heading and what are they doing. In the short-term, as the ESG landscape evolves, I think it will be important for investors and companies to support a path towards a set of, if you like, international ESG standards. There is today a lack of data standards in particular in this region when it comes to some of the data coming out of the companies here. It does create a challenge when it comes to trying to compare across the globe because the standards don't exist. And our clients are increasingly telling us about the lack of transparency in governance across many of these data providers. Now, as a proviso, this does not mean we have to have a single arbiter of standards or a single methodology. So we're not saying that at all, rather, it means everyone adhering to a central taxonomy that will allow us to better govern the quality of data. So as Anna mentioned, data will drive a lot of this, but we need to have that quality of data in place. The second point is really talking about transition finance and the role it has in achieving net zero. I think that may be key or one of the keys going forward. And financial services, of course, will play a key role in the efficient deployment of that capital. However, raising this capital, whilst maintaining living standards and enabling growth of impacted developing economies highlights that the theory of simply defunding the high emitting sectors is counterproductive. So simply stopping is not an option, which means transition needs to be very well-planned and having a good understanding of the impact that it will have if you stop doing certain things or if you accelerate doing certain things. There was a report by McKinsey, which analyzed how we can achieve the global transition to net zero by 2050, and it showed that the capital spending on physical assets such as energy and agriculture would need a boost of more than and I ask you to listen here, 3 trillion a year for the next 30 years. I'll let that sink in, 3 trillion a year for the next 30 years. I'll put some perspective around that number; 3 trillion is about the same as the total GDP for all ten ASEAN nations. It's a substantial investment that is required to get to net zero. So ultimately the ability from an investment standpoint to maximize returns will drive investment activity. So where we can see that direct link towards returns, the demand will turn up. So as the research and valuation tools to improve the availability of the quality of data multiplies exactly as Anna says, the inevitable outcome will be asset owners will see the benefits in making these investments underpinned by ESG considerations. And the demand for those financial products will then drive companies along that entire value chain to innovate. So there, the cycle will take off and the flywheel effect should take place. So the demand and supply should hopefully work in a way that provides us comfort that the data works and the demand will be satisfied by the supply from the company.
- Ric [00:16:33] Well, thanks, Kevin that's really interesting insights and those numbers are quite mind-blowing. You talked a little bit about sort of transition finance. Anna, what are you seeing in that space?
- Anna [00:16:43] I think with transition finance that is just a huge opportunity for the whole financial industry. And I think it's in a way, it's the solution to where we're netting out right now, where, you know, it doesn't make sense in some ways to just say we're going to sell all our oil and gas. And we're just going to like get rid of everything. I mean, it just it doesn't make sense because those oil and gas companies are, I mean, they have the know-how, they can help with the whole transition. So we all need to work together. And I think that's what transition finance is all about. Let's work together to find that solution. And, you know, right now the industry is coming up with some really interesting ideas about what transition finance would look like, how it would be structured, what are the different ways that people can invest in it. And so it honestly is so exciting. And I just think that this is the way forward and this is the way forward for everyone to sort of be part of the solution.
- Ric [00:17:58] Thanks, Anna, I think that's a really nice area to end on for today's podcast. I mean, as I said, I mean, this is a topic we could keep going on and on and probably talk all day on. But thank you both for sharing your time and sharing your insights. I've certainly found it fascinating to listen to so thank you - and thank you all for listening to our podcast today. If you'd like to hear more of State Street's insights, you can find that at statestreet.com/ideas and we'd love if you join us again for our next podcast in this anniversary series. Thanks.
Embracing Data Transformation
Data is an essential part of the investment industry. Organizations continue to dedicate additional resources to data transformation projects as the regulatory environment continues to evolve, making the operating environment increasingly complex.
In this podcast, our experts Clayton Issitt, our head of Alpha Client Solutions in APAC, and Peter Sherriff, director of Product Strategy in APAC at Charles River Development, explore the rising importance of data cloud and the value a unified data foundation can create for investment and operations team to work from a single source of truth.
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- Fiona [00:00:02] Welcome to another edition of our podcast series celebrating State Street's 40th anniversary in Asia Pacific. In this series, we explore how institutional investment has evolved in the region over the decades, as well as looking ahead at what the next chapter might hold for different types of investors. I'm Fiona O'Sullivan from Global Marketing at State Street. And today we'll be exploring the rising importance of the data cloud, the value it can create for institutions, and the ways in which firms are transforming their data management strategies. I'm joined by my two colleagues, Peter Sherriff and Clayton Issitt. Thank you both for joining us. First of all, I'd like to explore how the management of data has been transformed in recent years. Data is commonly referred to as a strategic asset that can deliver actionable insights. But historically, institutions struggled with data silos and the ways in which the data could be accessed, analyzed and shared. Peter, turning to you first, how has the cloud technology changed the landscape and opened up opportunities within financial services?
- Peter [00:01:00] Yes, thanks, Fiona, to be honest, data has been a topic of conversation for as long as I've been in the industry and really sort of technological developments have occurred at a reasonable pace over a number of years, but probably more recently, we've really seen an increasing pace in the evolution on the technology side of things. And a lot of that sort of coincided with just the rise in the number of data sources and data points that the firms really need to be able to access, manage, analyze and utilize as part of their investment process. So we've really sort of gone from this idea, as you say, of data silos, your individual systems being used by individual groups or users. And in some cases you have people living in their own little world with spreadsheets full of data that they made up for themselves almost. And then we've sort of gone through on premise data management, data warehouse type of tools where firms have really tried to bring those data assets together into a single, hopefully well-managed location. In reality, we tended to see that your firms ended up with multiples of those, even if they didn't necessarily realise that. But in the last couple of years, we've seen a real shift to try and move towards cloud-based technologies, first in terms of how to ingest and publish data and distribute it to different places, but sort of more importantly, if you like, in terms of how to aggregate that data and make it more accessible across the business. So that's why we sort of see cloud technologies, particularly key vendors that have been in the news lately, such as Snowflake providing those cloud native, highly scalable, highly performing tools that really help people bring their sets of data together in a more operationally efficient and effective way and providing new ways to really co-mingle data in such a way that you don't have to do as much yourself internally, because ultimately as in all walks of life, the challenge is always how do you do more with less from a resourcing perspective? Data is no different and really sort of those cloud data technologies become the enabler, if you like, for financial services firms that need to do more with their data, with the same number of resources within their sort of data science teams or their data management teams.
- Fiona [00:03:18] Great and Clayton, can you elaborate on how these developments are helping investment firms navigate through and reduce the data complexity?
- Clayton [00:03:25] Sure, thanks, Fiona, the growing sophistication and complexity of institutional portfolios does create new and changing demands on in-house data management teams. You know, if you think about different products, structured products, private assets, they all have different demands from a data perspective. On top of that, you add in layers of complexity with things like ESG, it becomes incredibly difficult to create a consistent, normalized view of data when it comes in very inconsistent formats from multiple providers. So ultimately, simplifying the data environment is one of the biggest tests our clients face. Technology and specifically the move to the cloud has really started to democratize the access to this data. This does things like enable self-service for the business and it starts creating value based on that accessibility. But importantly, it also frees up your high value data resources such as data scientists, to move to more value add instead of just writing reports, as we've seen historically. The move to cloud makes this easier. It's accelerated this; it provides stakeholders with accurate, timely and role appropriate data, all delivered from a service hub located in their geography, which minimizes your latency for daily data movements. This also leads into things like a co-sourced model, so it's no longer just mine or yours. It's a yours, mine and ours concept. So there's a continuum of what clients can do with their service provider. This enables clients to gain a full, auditable view of what's being done without the burden of actually doing it all themselves, you know, along with the operational scale that really only the very largest investment firms can achieve by themselves. This is a marriage of technology and human services so moving beyond a legacy database, which required expensive and very smart resources to get insights. You know, once you're in the cloud, you now have access to AI and machine learning technologies, which can find patterns and insights that humans never will. So again, enabling a move up the value chain for your very expensive data resources.
- Fiona [00:05:25] I'd like to dive a little deeper on those points and explore how organizations with legacy and complex infrastructure can improve their operating model by adopting a cloud data platform. Peter, what are some specific examples that you can share?
- Peter [00:05:37] I think actually I'm going to pick up on something that Clayton was saying about the yours and mine and ours. And I think one of the biggest things we're seeing where the cloud data platforms can help is actually making what is yours - mine. And what I mean by that is through things like the secure share capabilities that Snowflake has in its marketplace, you really have that ability and in very much a turnkey fashion to access data from a wide range of different sources without having to physically make their data, your data, by moving it, by trying to model it into your own systems and creating a whole process around that. So again, leaning on clayton’s theme around democratization of data - what that really does is enable any of those users across the organization in sort of relevant roles to access in a secure way the data that's being provided by those third parties, their service providers, but also across their in-house teams to access that on a near real-time basis in a live fashion, really sort of providing additional value, if you like, in eliminating data latency across the lifecycle of a business, making sure that everyone has that sort of single up-to-date consistent view front to back from an investment lifecycle perspective, but also increasing obviously both the breadth and depth of the data that different groups have access to. So we really see that live nature of the data through those cloud technologies, as being a massive enabler of better insights and again to Clayton’s point - freeing up resources for higher value tasks. And Clayton, you and I have worked on a few of these projects recently. Might be good if you walk through some of that depth and breadth that we've been seeing across the user base.
- Clayton [00:07:31] So it is about deepening and broadening the datasets that you can access and get into so, you know, things like different views of your data, your investment book of record, your accounting book record, your custody view, your performance book of record. These have all traditionally existed quite separately so bringing those together in a way that's usable becomes really important. And then when you look down at the depth of this data, you know, think about an example like ESG. So, you know, the first kind of run of ESG was historical scores looking at top-level just scores and ratings. And then the next level of that was to say, okay, well, we want to understand that there is an E, an S and a G component and so organizations can come up with their own kind of blended rating. And now what we're seeing clients and organisations do is really look at what makes up that E, that S and that G to really dive down into that kind of next level granular data to uncover indirect impacts to those scores. So it's, you know, it's a huge dataset that these clients are looking at and cloud technologies allows you to do that a lot more efficiently.
- Peter [00:08:37] And it's actually a really sort of interesting example as well, Clay, you talked about the ESG data of where we've been able to bring those different sources together in a seamless and live fashion comes into play because some of those more traditional suppliers of that sort of ESG data may provide slightly less granular data, so there's high top level ratings and that next level down of scores. But as they're trying to really get into the weeds, and particularly as they look at things like sort of transition to net zero from an investment perspective, being able to go and source information from niche providers, link that back into the information that they already have, would historically have been sort of a laborious challenge for the internal team being able to simply enable another data source in your cloud platform and link it seamlessly in real-time means that data can be accessed and can be used in hours or days instead of the more traditional sort of weeks or months. And that's really, I guess, where we're seeing these cloud platforms bring the most significant value, if you like, is just time to market, bringing new data into the organization and making it accessible again, as Clayton said before, to all of the different users in an easy to understand and digest way without relying on an IT resource at every turn.
- Fiona [00:09:56] So looking more, I guess, into sort of the Asia Pacific side here and we've heard about how investment managers in Asia Pacific are increasingly looking to new markets in order to drive growth and diversify their client base. But scaling up to a regional or even global operating model can be challenging. Clayton, what are some of the operational complexities that you're seeing within the data environment that clients need to work through as they grow and scale?
- Clayton [00:10:19] There's a number of things that they're facing. Ultimately, it comes down to a growing number of data sources, destinations of data points, all of which need to be validated, standardized, normalized, cleaned - eventually so that they can be distributed. Clients need to simplify. So this is an exercise of defining your use cases and then prioritizing them. What this does in practice is it simplifies. They need a solution that scales data management. So simplifying the modelling, the understanding of that data and productionizing that data, it needs to be done with the right amount of governance. So that includes things like a data catalogue and lineage. You need to be able to quickly understand what your data is, where it came from, and ultimately where it's being delivered. We know that there's never going to be a single solution that fits an organization everywhere they operate. So there's a lot of conversation or thought around using the 80/20 rule. So thinking about a data placement, for example, so what database will something be in? What can reside in my global cloud solution versus what needs to remain on premise to meet specific regulatory requirements for data residency, for example? So that's working towards a standard global operating model that provides scale benefits but flexible enough to adapt to your local nuances. So 80% of your data is in your global cloud or globally available, standardized, and then the 20% can be localized to meet some of your cross-border data requirements. The key is to ask how much of what we do can be standardized while retaining that flexibility to manage specific local requirements.
- Fiona [00:11:54] In many respects, Asia is seen as a region leading the way, embracing digitalization and adopting new technologies. Peter, are you observing any particular trends in adoption of cloud data strategies across the region?
- Peter [00:12:05] Absolutely, Fiona and I see in some areas and generally that means to a specific market and segment combinations, we're seeing a real push to be industry leaders and particularly in some of the wealth channels, with some of the neobanks and other democratized wealth start-up businesses as well. They're really sort of pushing ahead with leading cloud strategies and as part of their digital platforms. So we certainly see there's a few areas there where Asia-Pacific is leading the way. More broadly as we start to look across different markets and segments though, it's a bit more of a mixed bag, particularly some of the sovereign-linked entities and region will tend to have, as Clayton touched on before, quite stringent data residency requirements and that typically will also extend into some of the banks and bank-linked entities across the region as well. And then we see slightly more nuanced rules, maybe a little bit more relaxed for example, the asset management, investment management industry. There's obviously sort of still a lot of work going on behind the scenes. Within the different regulatory framework, ee've certainly seen a trend over recent years for the regulators to sort of move more towards acknowledging and recognizing, as well as even promoting in some cases the use of cloud technologies and how that can provide additional value to the business in terms of agility, flexibility, and also helping people reduce their overall total cost of ownership. We've seen a sort of a number of markets in regions take some sort of fairly significant steps in the right direction. But equally, we're seeing some of the providers out there starting to look across some of those smaller or more emerging markets and really start to provide their own sort of data centers and sort of technology platforms specifically in those markets to help address some of those localization requirements as well. So there's a lot sort of coming together, both from a regulatory and a tech provider perspective. This should see further adoption of cloud technologies as we sort of move forward over the coming years. I think the biggest thing that we see at the moment is there is just inconsistency across the region. And, you know, there's a number of initiatives behind the scenes to really start to progress that, to make it easier, for example, for information to move across borders and Singapore in particular has done a lot of work in striking agreements with other countries. I think the most recent example being Switzerland to allow more cross-border transmission of data based on a mutual understanding of appropriate information security and data privacy regulations. I think we're going to see that type of trend really continue and that will allow the Asia Pacific firms to take advantage of cloud platforms as we move forward as well.
- Fiona [00:15:06] Thanks, Peter. As outsourced data management becomes more mainstream, institutional investors are re-evaluating their operating models and are considering moving more of their non-core activities to partners like State Street. So as a final question to you both today, where do you see firms realizing the most value when adopting end-to-end data management platforms? Clayton, over to you first.
- Clayton [00:15:26] Thanks, Fiona. Yes, look I think flexibility is key here, especially in terms of the operating model for firms to have to realize the most value. I want to go back to a concept we touched on before - the co-sourced model. Through leveraging a unified security master and a managed data service, so therefore taking advantage of the scale that a service provider can achieve that allows investment professionals and their support teams to efficiently operate from a single source of truth across the front, the middle and the back office. As the firms grow, this brings diversity of geographies and asset classes and ultimately data. This operating model then scales with it - effectively out of the box. The firms can focus on their core competencies without having to onboard scarce and expensive talent or build their own data management infrastructure as we've seen historically.
- Fiona [00:16:15] And Peter?
- Peter [00:16:16] Yes, I think it's probably the opening for it perhaps is about the flexibility. And in this case, we're talking about flexibility in terms of the operating model; We touched before in the 80/20 local, global, regional. We've talked about the flexibility in terms of how the governance process is run so that leads into your co-sourced model and will actually run through then, the set masterpiece, as an example of an outsourced task on a shared platform. And then you wrap up again with so many of the other key values people are getting is really the scalability and time to market piece as the organization grows, whether that grows across markets or grows across investment products, the platform, the service, the model scales with them, without them having to reinvent the wheel, which is the traditional approach, if you like, is every time you go into a new business or a new market, you have to sit down and put pen to paper and work it all out first before you can start. We are saying that the platform provides in-built scalability out of the box.
- Fiona [00:17:30] Great point to wrap up on, Peter and Clayton, thanks again for joining me today and sharing your thoughts. Next up in the series, we'll explore how ESG has changed the investment landscape and what opportunities it presents for institutional investors in Asia Pacific. You can also find a range of regional insights online at statestreet.com/ideas. We hope you will join us again next time. Goodbye.
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How Are Asset Managers in Asia Pacific Prioritizing Growth This Year?
In our latest annual Growth Readiness Study, we sought feedback from more than 600 institutional investors across 21 markets on their key opportunities and challenges for growth in 2022.
In this conversation, our experts Pauline Wong, Country head of Hong Kong and Neil Macdonald, head of asset managers segment in Asia Pacific join Ric Shadforth, Head of International Marketing to discuss how asset managers in Asia Pacific are prioritizing growth this year and how they will go about achieving those ambitions.
They explore China as a key market and opportunity, technology, private markets and the rising importance of ESG.
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- Ric [00:00:02] Hello and welcome to another podcast from State Street. This is the first in a new series of podcasts to mark our 40th anniversary in the Asia-Pacific region. In this series, we'll explore how institutional investment has evolved over the years, as well as looking ahead what the next chapter might hold for different types of investors. I'm Ric Shadforth, Head of International Marketing at State Street, and today we'll be exploring the future growth opportunities for asset managers in APAC. We surveyed more than 600 institutional investors across 21 markets and sought feedback on their key opportunities and challenges for growth in 2022. Specifically, we'll dive into what asset managers in this region are prioritizing this year and how they go about achieving those ambitions. So I'm joined here today in Hong Kong with two colleagues Pauline Wong, Head of Hong Kong, and Neil MacDonald, Head of Asset Manager Segment for Asia Pacific. So thanks both for joining us. Neil, turning to you first, it's fair to say that the Asset Management Industry has faced a number of challenges in recent years, but can you talk us through some of the key priorities for growth and the opportunities that they have this year?
- Neil [00:01:06] Yes, thanks, Rick, and thanks for having us on today. Look, you mentioned challenges and I think it's important to say the industry has been challenged like many others over the past two years. I think it's also important to say the industry has been resilient in the face of the pandemic, and we should be proud of that. We see net flows into the industry since 2020, and here at State Street, we've continued to service our asset managers every day, settling trades, cutting NAVs and delivering trusted data into the hands of portfolio managers across the globe. Looking back, over the past couple of years, the pandemic has definitely seen an acceleration at the pace at which digital innovation is reshaping the industry, and as one would expect that's happening at varying paces across the major markets in Asia. Other opportunities, obviously ESG and the integration of ESG considerations into investment processes continue to grow across the region. Last but by far from being least, is the astounding growth we've seen in China, as it becomes a critical global asset management market. Returning to your question around priority growth areas, our survey shows a heightened focus on investment performance for managers in Asia Pacific and also a desire to expand the number of products and services offered. Another factor of note is the consistent increase in optimism on the longer-term growth outlook, a trend consistent across all regions. And but and it's an important but - we see managers in APAC are less bullish than their counterparts in Europe and North America. I think this also reflects cultural norms across the globe. But if we look at the key focus areas highlighted in terms of opportunities for 2022, then private markets and the rising importance of ESG were seen as the key opportunities for managers across the region.
- Ric [00:02:46] Thanks, Neil, interesting points there. I'm going to pick up on one of those points you made about China being a key opportunity for fund managers. I think this is particularly being fueled by that decision to remove the foreign ownership limits from fund management companies and Pauline, can you talk us through how these regulatory developments in China changing the landscape to Foreign Asset Managers?
- Pauline [00:03:05] Sure, thanks, Ric, yes, absolutely. China has really been quite fascinating story. Since 1998, when the first closed-end funds were launched in China, assets under the management grew from around 1 billion yuan to over 20 trillion yuan in just two decades. As a result of further relaxation Neil has just mentioned, foreign fund managers now have the ability to launch wholly-owned mutual fund businesses, which, unlike private funds, will have no cap on the amount of assets they can raise. So those who have been following the China market, this is a very significant market development and we expect to see some fund managers with market expertise to go directly into China. That said the local market nuances could not be underestimated and should be a critical component of any market entry strategy. We are seeing Asset Managers taking a varied approach to market entry from JVs and distribution partnerships to wholly-owned ventures, which suggests there is no clear consensus about what a winning model will look like. A key factor that should not be underestimated is obviously the ever-increasing digital demands of investors in China and how differently the market interacts with investment products. Interestingly, in the survey results, manager noted that the participation of fintech firms and the disruption they are likely to cause for the industry was a top 3 threat, for the first time in the last four years, so, as Neil noted, digital innovation is happening and is here to stay.
- Ric [00:04:40] Thanks, Pauline, and those unique distribution demands that you point to in the Chinese market are just one example, I guess, of where asset managers are needing to upgrade their digital capabilities. So, Neil, perhaps that's a good segue into technology investment and how Asset Managers are positioning themselves for future success. So what are some of the key areas for investment that managers are looking at this year?
- Neil [00:05:01] Maybe before I go to the technology point specifically Ric, maybe just to give you some data from the survey, if I can, around the extent of interest in China now, one of the stats from the survey shows, and again in line with what Pauline was just pointing out, 42% of survey respondents in APAC noted an intention to set up their own wholly owned-subsidiary in China. And a further 28% noted their intention to enter a joint venture with a domestic partner. This is on top of the significant number and significant names that we already know are onshore. So I think what you're seeing there is a broad pattern across the industry, global firms, local firms, regional firms, all seeing China as a significant opportunity. But II‘I move to technology. Technology will be a key enabler of success in China certainly, from my standpoint; it's the world's most digital asset management market in terms of investor buying behavior. China aside, 36% of respondents in APAC said they were looking to improve the way they serve the information needs of their customers. How do they get the right information to their investors to show how their investments are performing? A third of the survey respondents are focused on improving investment performance analytics. I expect these two metrics stem from the increase in maybe regulatory reporting, the need for more transparency or demand for more transparency for investors into portfolio holdings. But I think what it also shows that given its 36% and 33%, many managers chose to use the pandemic to invest in those areas, specifically because you couldn't physically meet people. So you were having to deliver information that you maybe delivered face-to-face, you now delivered digitally. So I think that the pandemic has spawned, as I said previously, a wave of digital disruption. On a positive note, Asia is leading the way here. So when it comes to investing in emerging technologies, 69% of respondents to the survey noted their intent to use it to kind of pay it forward if you like, and spend their scarce investment dollars on cloud, AI and robotics in order to improve their operational capabilities. So we've seen digital disruption, we are now getting I think to some extent towards the second wave we were seeing cloud, AI and robotics feature more heavily inside clients' operational investment portfolios.
- Ric [00:07:21] Thanks, Neil, and always nice to see APAC leading the way there in that area of technology. I think another important consideration is the regulatory burden that's increasing. It's been placed more on managers across the globe. So, Pauline, how are managers facing up to these challenges and where are they focusing their efforts?
- Pauline [00:07:38] Yes, this is an area attracting an increase in focus for a number of reasons. We see APAC as the next frontier for ESG and the region's managers are now accelerating their adoption of ESG practices. But the absence of a pan-regional regulator does make it challenging. The survey highlighted that as access to ESG data and analytics was of concern to APAC managers, which has a number of flow on effects from a reporting perspective. Another area of heightened focus is digital assets. This is absolutely consistent with the conversations we are having with clients, given some of the regulatory developments that we have seen play out across the region. Over half of the managers responded to the survey noted an increased cost in regulatory compliance as they get up to speed with the ongoing developments. Last but certainly not least, is Cyber Security. With prolonged work from home arrangements and in many cases, the new normal, Asset Managers are increasing their spend around cyber security infrastructure. This is to monitor things like communications, emails and Internet usage. We expect this to be an evolving process as firms grasp an optimum and sustainable workplace of the future model.
- Ric [00:08:59] Yes, cyber certainly is a big threat, not just for institutional investors, but I think so many industries across the world today. So before we finish, I have just one more question I'd really like to touch on ESG, especially because that was called out as a key priority growth area for this year. So, Neil, what are you hearing from your clients around ESG integration and their sort of ability to meet investor demands in this space?
- Neil [00:09:21] Yes, I think it's a very pertinent topic Ric, and I think it comes up in pretty much every meeting I have with clients. Asia is I think for sure, is the next frontier for ESG. But what we're seeing here and it's coming through in the survey is a big capability gap, especially in comparison with the European managers. Capability gaps in engagement and stewardship and compliance and regulatory reporting and policy and governance are really importantly, what this comes down to is it's a capability gap in terms of talent. We just simply do not have enough ESG experts in the region. The lack of ESG data standards also creates comparability challenges, and many regional managers are concerned about the poor coverage in terms of ESG data across some countries and the lack of transparency and discretionary judgment in data providers' scoring methodologies. Imagine the poor PM sat there, having to look through a portfolio of stocks with wildly different scores between the data providers with respect to the ESG credentials of that stock, it must be a nightmare. So when you attempt to comply with multiple regulatory frameworks, meet industry-reporting standards that are constantly evolving, you can see why this might be challenging for our asset management clients. And with that said, I'm not sure I can hold out any good news on that front. I really do not expect to see a unified global standard for ESG reporting in my lifetime. So there's certainly work to be done in this space, and we are constantly engaging at industry level and also with our clients about how we can help them access, transform and utilize ESG data in smarter ways in order to integrate their perspectives on ESG into portfolios and thereby direct capital to those investments that will help us create a more sustainable future for our children and their children after. The asset management industry has a vital role to play in creating sustaining this beautiful planet and State Street is looking to play our part by making sure that our clients can have and act on the ESG data that is available.
- Ric [00:11:22] So on that positive note, we'll finish up there, Pauline, Neil, thank you for your perspectives today.
- Neil [00:11:27] Thank you, Ric.
- Pauline [00:11:28] Thank you.
- Ric [00:11:29] And thank you for listening. You can find a range of other market insights from State Street and thought leadership articles at statestreet.com/ideas. We look forward to sharing more insights with you in our next podcast.
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