Keen to leverage their ethical and technological expertise, many private banks are promising to make ESG investing available through digital channels. But the challenges of providing this should not be underestimated
If you thought banking, managing assets and sifting data were enough, think again. Private banks are increasingly claiming to act as moral guardians of their clients’ wealth, codifying investment philosophies, judging what is good for society and the climate. Many promise to make this already complex set of demands accessible in a digital format.
Private banks have only recently began catching up with other sectors of the economy in terms of innovation, so the moral dimension and its digital incarnation present a major new barrier. The war in Ukraine further complicates ethical investing. But small steps are being taken towards what was recently an unattainable goal.
While all the largest players claim to have an ethical, digitally enabled option to their portfolio management – even those who have nothing resembling this to offer – it is not yet clear if this is the best way forward for their industry.
Private banks and those who assess them are surprisingly split on whether environmental, social and governance (ESG) investing, through digital channels, is possible, or indeed desirable. And the fault-line across the wealth management universe is far from obvious. Even some digital mavericks are not convinced by the advantages of on-demand moral guidance.
ESG investments are by no means likely to be ubiquitous, believes Keith MacDonald, head of UK wealth management at consultancy EY. While scoring ESG criteria is appealing, it is unlikely to become mass market nor will it necessarily be a key differentiator between private banks, according to this school of thought.
Sparking new debate
Naturally, the recent controversial speech of HSBC Asset Management’s responsible investing boss Stuart Kirk at an FT conference springs to mind. “Who cares if Miami is six metres underwater in 100 years?” he asked. “Amsterdam has been six metres underwater for ages, and that’s a really nice place. We will cope with it.”
Despite the flippancy, and some feel disrespectful nature of his remarks, Mr Kirk’s aim was successful. He has sparked new debate in the ESG sphere. Its approaches, some feel, are often inconsistent, with a handful of genuine players working alongside many charlatans.
The recognition of the sector’s shortcomings is overdue. The debate intensified back in 2021, with the firing by leading German portfolio manager DWS of sustainability head Desiree Fixler, after she questioned the firm’s claim that more than half its $900bn in assets were invested according to ESG criteria. This was followed by a recent police raid and resignation of the DWS CEO.
These dramatic events show the concept of ‘Greenwashing’ is no longer just a philosophical talking point. It is front page news and the financial industry is clearly divided when discussing it. Only now are problems surfacing.
Take Fortu Wealth, which has caused a stir with its digitally enhanced – read robo plus occasional human override – capability. Fortu Founder Azamat Sultanov believes ethical investing is not only still a niche, applicable for a smallish cohort of ‘millennial clients,’ but ultimately a luxury, attracting less attention in tough times.
When the proverbial wolf is lurking at the door, he says, investors seek basics of maintaining value, modest returns and regular yield, rather than classifying stocks according to how much they damage the climate.
Sin stocks
Moreover, there has been much scepticism about the efficacy of latest environmentally friendly investment techniques. “The world’s 20 largest ESG funds hold on average 17 fossil fuel companies in each of their portfolios as well as tobacco, weapons and alcohol,” says Sharmil Patwa, founder of wealth management consultancy Opus Una. “So just how effective is ESG screening?”
On the other side of the divide are voices more conducive to an ethical revolution, backed by digital artillery. Banks are more than capable of combining technological tools with data driven hyper-personalisation, believe the post-modernist school’s proponents such as Urs Bolt, project manager for IT consultancy ti&m.
“With the current state of technologies it is possible to customise investment proposals along economic, environmental, ethical, social and governance lines,” he says. “All of this can be done before they are presented to clients, whether via self-service portals or tech-enabled advisers.”
Within reach
The notion of digitally filtering investments for ESG factors falls well within the realms of reality and is something banks are morally obliged to consider, believes independent wealth management consultant Seb Dovey. “Critically, even if clients are not expecting this, as an industry would it not be the right way forward for all of us to include it?” he asks.
Switzerland’s UBS, which now refers to itself as “the world’s largest network for private money”, suggesting it has a cultural, societal raison d’être in addition to financial motivation, says it has made ESG investments its “preferred solution” for clients investing globally.
Lombard Odier in Geneva, an innovator and early mover in this domain, attempted to overcome “significant data challenges” when integrating ESG methodology into all its investments decisions. It is even approaching the Holy Grail of including private markets in its digitalised ESG offer.
Yet the challenges of digitalising these intensive asset management disciplines should not be underestimated. Many private banks are struggling with collection, handling and processing of data, though few admit it.
Extending data to ESG puts this in even clearer focus. Some will embrace the task ahead, others will duck the challenge. Let’s be wary of those who portray it as a walk in the park, or a Swiss lakeside stroll.
