Is your money financing fossil energy, gambling or weapons?
by Patrice Hiddinga, CEO of Manaos
If you invest in an insurance product or a fund, I’m afraid the short answer is most probably YES.
Why? Because the financial sector is structurally opaque even if it is not intentional. Some asset managers may consider the composition of their funds a trade secret, but opacity mainly stems from technical problems: getting a full, detailed view of an investment portfolio is hard.
So most investors give up.
Nutritional value VS. ingredients
Any investor, professional or individual, who aspires to invest in funds can have access to a description form that will shed light on its category, its level of risk, its notations. As for food, this nutritional description form shows the number of calories, the rate of sugar, and so on, but not its ingredients.
Which is a true problem for any individual who doesn’t want his money to finance such or such sector, or for an institution who has fiduciary obligations and must respect an investment policy. Given current market transparency, the advertisement leaflets of funds should perhaps list similar indications to those of food ingredient tags — i.e. this product may contain traces of — in this case, not nuts — but oil, coal, armament, or gambling industries…
Open the Russian dolls
This issue goes hand in hand with the intricacy of the financial web. An insurance company can buy funds, who themselves buy other funds, who in turn buy financial derivatives on underlying assets who may just be indexes comprised of stocks or bonds. This kind of complexity is overwhelming. Under these conditions, ensuring portfolio transparency is a real challenge.
Yet, the question of fund composition is nothing new. Since 1981, American professionals created the first Social Investment Forum, which inspired numerous Forums for Responsible Investment in Europe and Australasia. In 2018, the French Social Investment Forum, the AFG (Association Française de la Gestion Financière), and the Eurosif have updated their Transparency Code to improve the legibility of the SRI funds approach. However, positive as it may be, this approach does not address the crucial issue of exclusion policies. We must open the nesting dolls to make sure our portfolios are exempt from pornography or weapon companies.
Solvency 2: “Not quite there yet”
In this area, Europe benefits from a positive practice related to its regulation Solvency 2. This regulation constrains insurance companies to “transparize” the assets held in their balance sheets in order to calculate their risk. For more than 10 years, investors have required asset managers to whom they entrust their money (and that of their clients) to provide them with monthly or quarterly look-through reports (opening the nesting dolls). This exchange of data has become very complex as institutions struggle to standardize exchange formats. The tripartite (“TPT”) format from the AMPERE Club in France stands out as the best initiative so far.
However, from our hands-on perspective at Manaos, this standardization remains, at most, relative. Most asset managers interpret the column captions or fail to fill the cells properly. As a consequence, thousands of back-office operators around the world sign confidentiality agreements and exchange excel sheets as a dubious attempt to compile a trust-worthy view of investment portfolios. The results are always inaccurate, delayed, and incomplete. De facto, an insurance company invests in dozens if not hundreds of funds. As long as a fund won’t impact its solvency ratio in a material way, the investor won’t run the extra mile to collect, process, standardize and compile the whole dataset.
Reconcile transparency and data confidentiality
What is typically acceptable for a financial calculation like Solvency 2 is not transposable for socially responsible investment reporting. Clients will soon request to open the nesting dolls of investment in search of companies they don’t want to have anything to do with. Even though exclusion policies are listed and followed at best, they can’t be complied with 100%, given the current practices. An end-of-month look-through on a single segment of the portfolio is by no means enough to reach clients’ expectations, nor is it enough to tackle the challenges of responsible finance.
We all need full transparency on a daily basis through all investments in order to comply with our legal and moral obligations. The industry needs a high-tech platform that harmonizes data at an industrial scale while ensuring data security and confidentiality at the same time. That’s what we built at Manaos. Our investment data platform shall have both a financial and societal impact: it will improve insurance companies’ solvency calculations and help address the climate change challenge.
— Photography by Harrison Haines