Evolution of the custody business: Part 2

Evolution of the custody business: Part 2 banner image

In Part 2 of this two-part virtual discussion with the Pension Investment Association of Canada (PIAC), RBC Investor Services’ Chief Executive Officer, Claire Johnson, shares her perspective on ESG and private assets.

How has the custody business responded to ESG concerns being placed on your business but also on pensions and asset managers?

While investor demand is driving a significant focus on environmental, social and governance (ESG) investing amid a plethora of “net-zero” commitments, the topic remains highly controversial across the investment community. Investors continue to face significant challenges in comparing ESG data and making informed decisions about their ESG investments due to a lack of standardization in taxonomies and reporting. But progress is being made.

Investors continue to face significant challenges in comparing ESG data and making informed decisions

The European Union recently adopted broad ESG disclosure rules—the Corporate Sustainability Reporting Directive—requiring corporations to disclose their effects on the environment and society. Canada and most of the rest of the world will be adopting the International Sustainability Standards Board (ISSB) “double-materiality” reporting guidelines with local jurisdictions deciding when the requirements will apply. Meanwhile, a new Canadian Sustainability Standards Board and Canadian securities regulators are looking at how the broader ISSB standards can be applied in Canada, while provincial watchdogs are focused on developments at the US Securities and Exchange Commission, which is in the process of developing its own rules.*

We are seeing an increase in RFP questions on the topic of ESG as asset owners look to invest a portion of their portfolios in ESG but continue to have their eyes on overall portfolio performance. The questions generally relate to custody reporting as part of performance measurement and compliance monitoring. Differences in standards, taxonomy and maturity make it particularly challenging to comply with evolving ESG regulation across multiple jurisdictions. The custodian, as a central collector of investment data, ultimately has an important role to play in supplying ESG solutions adapted to the different distribution and investor profiles of owners and managers.

The custodian, as a central collector of investment data, ultimately has an important role to play in supplying ESG solutions

ESG is a complex topic involving nonfinancial information in multiple areas (environmental, social and governance) and, while the “data gap” appears to be narrowing, it will take time to establish the necessary global standards to meet this challenge. Nevertheless, one can’t over-emphasize the urgency of bridging this gap as we look to ensure that future generations are able to enjoy our incredible planet.

RBC Investor Services’ enhanced product offering connects client portfolios with ESG data and analytics tools, leveraging our technology platform and data providers.

*The Globe and Mail, Canadian companies swept up in new climate disclosure rules in Europe, October 24, 2023

STORY CONTINUES BELOW

How has the move towards private assets by plans impacted the custody business?

Asset owners continue to embrace private assets as they look for opportunities to diversify their portfolios and enhance the ongoing sustainability of their plans within a challenging business environment. In addition to such factors as market volatility and increasing political turmoil, Canada’s aging population is set to inflict increased pressure on the pension sector. The easing of pension funding rules in certain provinces has provided the opportunity for plans to supplement their portfolios with potentially riskier and higher-return investments such as private assets to help meet increasing pension obligations to an aging workforce.

Asset owners continue to embrace private assets as they look for opportunities to diversify their portfolios

In response to the growing demand for private assets, custodians face the challenge of how best to align their product offering and organize their teams to support “alternative” investments. Private assets require an operating framework and workflows that differ significantly from the traditional model for public assets. Custodians need to adjust their processes, systems and infrastructure to accommodate the complex, manual-intensive processes around the administration of private assets.

Custodians need to adjust their processes, systems and infrastructure to accommodate the complex, manual-intensive processes around the administration of private assets

This requires a unique set of data management tools due to the unstructured nature of private asset data, lack of standardization and transparency, and significant latencies. In particular, we’ve seen increasing interest in real-time data related to transactions/cash movements, as well as enhanced reporting for private assets, including comprehensive valuation breakdowns and access to performance reporting specific to this asset category. We’re also being asked to take on a more active role in capital calls and distributions to help alleviate clients’ administrative burden. 

As private asset investments become increasingly important, RBC Investor Services clients continue to receive accurate and timely data to support their strategic decisions.

Read part 1 of the discussion published in October 2024.

You may also like