Whether you binge on sport, politics or finance news, you may have noticed few words appear in headlines as often as the word ‘rules’ recently.
Over the past month alone, major stories have emerged around rules changes to sports like rugby, uproar over whether former Prime Minister Boris Johnson breached rules governing ex-ministers, and countless stories surrounding EU trade rules.
But arguably, the industry most obsessed with rules over recent months has been the asset management sector.
Indeed, an onslaught of new rules continues to polarise opinion in the investment space – whether it is intricate reporting, esoteric guidelines on inducements, watertight risk management standards or Solvency II data requirements.
And that is ignoring where the greatest degree of change is occurring from a regulatory reporting perspective: ESG investing.
The latest out of the ESG corner comes from across the pond, with the US Securities and Exchange Commission reporting it is cracking the whip on greenwashing funds by requiring a broader range of labelled funds to prove that 80 per cent of their holdings match their names.
Many argue the sheer scale of ESG compliance now faced by asset managers across the globe serves as a deterrent both to investing in ESG and doing what asset managers do best: beating the market. Indeed, many firms are even lobbying to scrap these rules.
But to all the naysayers that say these new rules only serve to stifle innovation and growth in asset management, and sustainable investing in particular, it is worth asking what the alternative solution is.
Rules, at the end of the day, are rules. Surely, it would be a better use of an asset manager's time trying to best work out how to interpret and apply the rules efficiently and effectively instead of lobbying to scrap them completely.
When it comes to ESG regulation, the issue is not so much the objectives that the rules are looking to achieve, it's more about the ambiguity surrounding how they should be applied.
Certain asset managers may try to create several international funds that incorporate ESG into their investment objectives, only to discover what is considered ‘ESG appropriate’ differs significantly depending on the region in which the fund is domiciled.
Before they know it, a fund manager could find themselves in deep water just because they failed to grasp the specific regulatory nuance that suddenly deemed their Luxembourg fund non-ESG complaint.
Then there is the delicate issue of who is responsible for the rules inside an institution.
If, for instance, rugby teams are currently grappling with a decision over whether the players or coaches are responsible for adhering to new rule changes, then the same issue can be applied to asset management.
