Being lost in a candy shop – how to make the most of your data
The Network Forum Annual Meeting took place in London on 13-14 June 2022. Our Societe Generale experts participated to this event, which gathered the custody and post-trade industry together for two days of panel discussions and networking sessions. Alessandro Cavallari, the new Head of International Sales, Societe Generale Securities Services, attended the Forum and talks about some of the topics covered by our experts.
Financial institutions – including asset servicers – are being squeezed by today’s unforgiving macro conditions, a problem which has been made worse by the spiralling costs of regulation. At the same time, asset servicers are operating in a highly competitive market environment, meaning firms need to differentiate themselves from their peers if they are to attract new business. In this increasingly complex world, how are asset servicers distinguishing themselves from the rest and generating additional value for clients?
Many asset servicers are looking to expand their product suites by focusing increasingly on developing data solutions and supporting institutional clients with their ESG (environmental, social, governance) requirements.
Data as a success enabler
Data – if used correctly – can be invaluable, offering financial institutions unique insights into their investment and operational processes. The problem, however, is that there is a massive groundswell of data, and a lot of it is inaccurate, unstructured or without clearly-defined lineage.
Sifting through this vast trove of information and organising it into something which can be leveraged by clients is a very challenging proposition for asset servicers, notes Yvan Mirochnikoff, Head of Digital Solutions at Societe Generale Securities Services.
The main challenge is to improve the quality of data. Mirochnikoff continues that poor quality data precludes providers from using artificial intelligence (AI) tools to analyse the information, as the analytics would likely be wrong.
Moreover, some of the logistical difficulties faced by asset servicers when verifying the sources of data could also invite contractual and regulatory scrutiny.
So how can they make sure they are on top of data management?
Upskilling, hiring the right talent and collaborating with external partners, who have the right skills, is essential, says Mirochnikoff.
This could prove complicated in today’s labour market, however. According to some panellists, there are only a finite number of data and digital experts in the marketplace, and this absence of talent is frustrating the efforts of some financial institutions to strengthen their data propositions.
Obtaining revenues from data is not as easy as many people assumed it would be. The problem is that not all clients are willing to pay for data, especially if they are the ones providing data in the first place.
In order to generate cash-flows from data, Mirochnikoff says it is vital that asset servicers provide value when sharing data with clients. In the case of tier one asset managers, he says providers are increasingly offering bespoke data services, whereas the solutions given to SME investment firms tend to be more commoditised.
On the operations side, a number of actors are using data analytics to support clients with their settlements. By analysing metrics around settlement fails, some of them are even building in predictive analytics capabilities, alerting clients to when they might be at risk of suffering from settlement fails.
With regulators imposing penalties for settlement fails under the CSDR’s (Central Securities Depositories Regulation) SDR (Settlement Discipline Regime), these sorts of tools could help financial institutions avoid unnecessary costs and charges.
Elsewhere, the emergence of new asset classes – namely digital assets– is also providing asset servicers with a commercial opportunity. By sourcing market data on digital assets and aggregating it into useful insights, they can supply clients with cutting edge information.
However, there are some barriers to be overcome. Mirochnikoff says that crypto-assets trade 24/7, which means custodians will need to develop the infrastructure to obtain real-time market information, including at weekends.
The delivery of market-leading data to clients is a service which asset servicers are looking to augment. As such, it is likely that providers will focus increasingly on their data strategies moving forward, so as to attract more mandates.
Leveraging on ESG data
ESG investments are growing at an unprecedented pace, with $500 billion flowing into ESG-integrated funds in 20211, a sum that is projected to increase. According to Morningstar, ESG funds managed $2.77 trillion in the first quarter of 2022, up from $1 trillion in 2019.2
ESG is now integral to the investment process with allocators increasingly awarding mandates based on whether or not asset managers are committed to sustainability.
At the same time, there remains a lot of ambiguity on ESG – a problem that has been compounded by competing standards and arbitraging regulations. Aside from creating confusion, the haziness around what constitutes ESG has encouraged some managers to greenwash their funds, although this is an issue which regulators are more aware of now.
The debate around ESG is riddled with contradictions and dilemmas though, a point made by Geoff Dawes, Research Manager at Societe Generale. He notes that should a bank or fund manager refuse to finance a fossil fuel company’s operations, that same organisation may instead turn to an alternative lending source where the borrower terms are much looser, or pay little credence to ESG.
As a consequence, the question behind this is: how could financial institutions finance the energy transition of such companies?
Conscious of the challenges around ESG investing, a number of asset servicers are developing ESG reporting solutions for asset managers and asset owners to help them navigate some of these complexities. Again, this will help the industry in its efforts to stay relevant moving forward.
Bracing for a bright future
While asset servicers have faced a number of acute challenges recently, the industry is regaining its footing. Through the provision of data and ESG solutions, they are once again demonstrating their value.
1JP Morgan Asset Management – February 1, 2022 – ESG Outlook 2022
2Financial Times -May 24, 2022 – SEC prepares to crack down on misleading ESG investment claims