ESG Regulation – What does this mean for Governance Recruitment in Luxembourg?

Climate Change is the strongest driver for new approaches to investing. Asset Managers are now exposed to new risks, but also to new investment opportunities. Firms with robust ESG (Environmental, Social and Governance Investing) or sustainable investing strategies will be better positioned for the future. In addition to reaching regulatory good governance, these firms will be satisfying the growing and increased demand by stakeholders and investors to meet new ESG accountability metrics. In a Financial Times article, Peter Harrison Chief Executive of Schroders stated that “clients are looking to have a social impact beyond just purely financial returns with their investments.” 

According to new data from PwC Luxembourg, “ESG represents the largest fundamental change in the investment landscape. It forecasts that European ESG Assets are set to reach between €5.5 trillion and €7.6 trillion by 2025, compromising between 41% and 57% of total mutual fund assets in Europe.”

New Risks – Brings New Regulation

A) SFDR – EU Sustainable Finance Disclosure Regulation – applies to asset managers, managers of UCITS and all forms of AIFs, insurance companies that provide insurance-based investment products, occupational pension funds, personal pension providers and financial advisers. 

SFDR requires firms to incorporate sustainability risks across various of their operations, this includes:

• ESG Disclosures – firms must be able to demonstrate whether and how ESG factors are integrated into investment decisions; the disclosures must be included in pre-contractual documents, periodic reports and on firms’ websites. 

• ESG Integration into policies – policies must also be published on company websites. 

SFDR requires mandatory ESG disclosures to be completed by the 10th of March 2021 deadline. 

B) Taxonomy Regulation: defines the standards for determining whether an economic activity is environmentally sustainable and includes additional product-level reporting requirements for products that promote environmental characteristics.

Increase in Reporting  

Asset Managers will thus need to refine their data collection capabilities to satisfy increasing regulatory reporting requirements, and the obligation to disclose ESG Strategies to client and fund investors. To facilitate, the European Supervision Authorities will design a mandatory reporting template, which will specify where companies should place disclosures on their websites. 

A recent KMPG study revealed however that this is not a straightforward task, as “the biggest challenge for a typical asset manager that invests in multiple asset classes, industries and geographies, is that they have various ESG considerations, which depend on underlying data for informed and accurate decision-making.” 

How has Luxembourg responded 

Despite the unprecedented market volatility of 2020, Luxembourg remains resilient and a preferred jurisdiction to establish UCITS and Alternative Investment Funds in Europe. Loyens & Loeff recently cited that “the assets under management of Luxembourg-domiciled funds stands at almost of EUR 4.7 trillion as at September 2020”. 

• Luxembourg’s Ministry of Finance and the Ministry of Environment launched the “Sustainable Finance Initiative Strategy”. This strategy will function as an action plan, a roadmap with recommendations, which will “promote and support the financial centres transition toward sustainability.” Philipp von Restorff, Deputy CEO of Luxembourg for Finance, noted that the day the “the launch underlies Luxembourg’s commitment towards building a sustainable and circular economy.”

• Luxembourg for Finance reported that Luxembourg is also the first European country to launch a Sustainability Bond Framework.  The framework will focus on green, social, and sustainable bonds, “combining ecological and social benefits.” The revenues obtained through these bonds will be invested by the government in new sustainable projects. “This framework is the first in the world to fully comply with the new recommendations of the European taxonomy for green financing.”  

So, what does this mean for Governance Recruitment?

Increase in Hiring – Firms such as Standard Life Aberdeen, AXA IM, BlackRock, Aviva Investors, Columbia Threadneedle have publicly disclosed the planned growth in their sustainable investment teams. Increase in contract/project type work – Because Asset Managers are working at pace to adhere to new ESG regulations, there is scope for specialist contractors to guide firms in implementing their ESG action plans within tight timelines. 

Increase in ESG Training -Russell Investments among many other Asset Managers are investing heavily on “comprehensive training for all investment professionals on how to effectively integrate ESG into their investment process” (Financial Times). 

Candidates across governance specialisms are pursuing employers that offer ESG training and accreditations – This is specifically relevant to the Luxembourg market as the surge of new firms applying for authorizations and licenses in Luxembourg, has meant a rise in the enhancement of governance structures, and a need to hire both Risk and Compliance professionals. Candidates are aware of their worth, and are asking for higher salary increases, and better benefits packages when making an external move. With a buoyancy in the market, and a tight candidate supply, the competition is high. Employers are increasingly obligated to pay higher salaries, higher bonuses and LTIP schemes to lower their attrition rates. With ESG becoming centre stage, many employers will need to offer enhanced ESG training and educational support, to avoid losing staff to competitors, while at the same time, continuing to attract the top talent in the market. 

How can Barclay Simpson help? 

If you would like to discuss the themes outlined above or would like to have a confidential conversation about your recruitment plans in 2021, please do get in touch as we would welcome the opportunity to partner and collaborate with you. 

Nicole Madriz – Principal Consultant – Risk Management – Luxembourg & Ireland