Asset Management

First, as any financial institution, asset managers have had to adapt extremely rapidly to the numerous packages of sanctions that were imposed to Russia. While the investment universe was shrinking due to United States and Europe sanctions, operations were heavily disrupted by counter-sanctions preventing foreign investors in Russia to repatriate their proceeds. Later sanctions onto the Swift network finally killed the ability to settle anything with Russian banks. In this context, fair value of Russian assets became a problem that resulted in many products dominantly invested in Russian assets to simply close their subscription and redemption. For funds with less stranded assets, side pockets were reintroduced allowing investors to enjoy partial liquidity of their assets.

Exacerbation of geopolitical risks in Europe and later in Taiwan had dramatic macroeconomic ripples, generating higher volatility in the markets with an increased downside risks and fears of recession. As a fiduciary of the long term assets invested by our clients, asset managers had to mobilize the best of their analyst resources to correctly read the market and to raise their game level in risk management, tightening their controls on asset liquidity and volatility.

We also clearly entered into a new economic regime shift, especially with the return of inflation and higher interest rates, which eats the future returns of financial investments. Our clients now need to protect their investment from inflation and this requires a reallocation of portfolios toward inflation resilient assets such as real assets, inflation protected bonds, and more targeted equity sectors such as energy, commodities and banks.

All of these are standard reactions to an economic crisis. However, the development of Ukrainian crisis into the energy domain had deeper consequences in the ESG (Environment, Social and Governance) trend and performance of asset managers. While Europe became under the pressure of falling Russian gas and oil supply, a greater independence in the energy resource, and sobriety in consumption suddenly became two keywords that disrupted the long-term plans for decarbonisation. This incidentally resolved the long-standing dilemma for considering nuclear energy as “greener than fossil energy”, both in Japan and in Europe, and accelerated the transition to a “net zero” world.

As a result, European governments reoriented objectives for toward zero exposure to Russia of their energy industry and European regulators continued to raise the ESG bar in order to avoid greenwashing. In this context, asset managers had to reconsider many aspect of their ESG evaluation. Reputational risk faced by companies continuing to work with Russia needed to be taken into account, and substantially affected the S and the G dimensions of the evaluations.

Yet, in 2022, the good financial performance of traditionally poorly rated ESG sectors such as carbon energy producers and defence industries, unfortunately turned many ESG investments into low performers.

The destructions caused by the war itself and the possibility to increase temporarily the dependency to coal energy are definitely headwinds for climate control. On the other hand, the reckoning of the need to accelerate the transition to renewable energies is forcing our policy makers to strengthen the requirements and disclosures applying to ESG funds, further positioning Europe as a leader in ESG investment.

As such, European asset managers are well positioned to contribute to the ongoing debate open by the Japan FSA on how to regulate ESG investment.