Written by: Daron Pearce | CEO, BNY Mellon Asset Servicing EMEA
2018 has been the year of talking about ESG (environmental, social and governance) investment. In 2019 we are likely to see that discussion turn more decidedly to engagement and action.
The investment industry is on a journey with ESG. Sustainable investment has evolved from negative exclusion to positive inclusion. From the relatively straightforward approach of avoiding investment in businesses connected to sensitive issues such as gambling and tobacco, it is moving towards actively seeking responsible investment opportunities to generate both better investment returns and greater social good. This more nuanced approach to sustainable investment requires the development of more complex metrics, benchmarking and monitoring. There has been much activity in the development of ESG standards, taxonomies and legislative proposals. While some key elements of the new ESG landscape are not yet in place, 2019 may be the year when ESG goes mainstream.
BNY Mellon’s recent paper, ESG Investing: Setting a Course for a Sustainable Future, sets out the current issues for sustainable investment, from the work being undertaken by governments and industry bodies to set common principles and frameworks, to the practical challenges that lie ahead for asset owners and asset managers in developing their investment strategies and product ranges.
The attractions of private markets are unlikely to lessen in 2019. The potential for alpha through exposure to private equity, real estate, infrastructure and private debt continues to encourage capital to flow into private markets investments.
We are seeing private debt/credit as a particularly strong growth area, with many new loan funds coming to market, a lot of those based in Luxembourg. The regulations that have driven bank disintermediation since the global financial crisis have supported the growth of private debt. Low credit spreads in public markets have made private debt attractive to those investors – typically insurance companies and pension funds – who are willing to exchange liquidity for incremental and predictable returns without elevated risk.
In 2019, we may witness an accelerated focus by private markets investment managers on processes, discipline and structure; in effect, a more ‘institutionalised’ approach to running their businesses. Combined with outsourcing back office functions, this will encompass better analytics and risk-management processes.
We are seeing a sharp increase in interest in launching new ETF fund ranges into EMEA, especially from US asset managers and some large UK asset managers who had until recently kept a ‘watching brief’ for ETFs. Based on the conversations we are having, this is likely to add up to a significant number of new entrants to the European ETF market in the first half of 2019. Some of these new entrants will be facilitated by HANetf, Europe’s first independent white-label ETF platform, for which BNY Mellon provides custody, administration and trustee services.
Fee compression has continued for ETFs over the last year, culminating in the launch of the first zero-expense ratio funds in August. No or very low fee ETFs may become the norm, at least for core ETF products covering large cap indexes. While new launches with smart beta strategies will be able to maintain a premium over these rates, the general direction for ETF fees into 2019 is downwards.
One thing is certain; 2019 will keep asset servicing providers on their toes, reflecting what is likely to be another busy and unpredictable year for many of our clients.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.