Tools for the trade
David Batten
explains how the technology spend of leading
global custodians means that a reporting infrastructure already exists
to be exploited by fund managers and trustees.
While trustees and fund managers have been deliberating their
position with regard to socially responsible investment (SRI),
custodians have been reviewing the likely outcomes, potential demands
about to be placed on them, and looking for opportunities to highlight
their own value added services.
Soft soundings with out own clients on the likely outcome of
deliberations around SRI type issues suggest that the potential
conflicts between investment return and ethical issues will not result
in a steep change in attitudes but a gradual explicit incorporation of
ethics and social issues into investment stances.
Broadly
speaking, the argument goes that with heightened public awareness,
companies which are seen to have a negative impact on the environment
or are deemed to be less than ethical in their approach to business
ate likely to suffer a comparative drop in profits and performance.
Thus such shares are unlikely to appear in a scheme's assets. This
does not of course hold true for those schemes utilising index funds,
nor possibly those with part of their investments in pooled vehicles.
Nonetheless, fund managers do quite logically confirm that social
environmental and ethical considerations do already play a part in
their selection process.
The new requirements are for trustees to disclose "the extent (if
at all) to which social, environmental of ethical considerations are
taken into account in the selection, retention and realisation of
investments". There is no requirement for change in outlook, merely a
requirement to state whether such considerations are taken into
account. In this, there are similarities to the situation regarding
the exercise of voting rights on shares owned by the scheme.
It is
thought that the majority of schemes have sought, or will seek, to
delegate the policy for such matters to the fund manager.
The
immediate consideration is therefore whether the carrying out of the
stated policy needs to be monitored or not. If so, who would be able
to do this in an independent fashion?
Fortunately a handful of
custodians already have systems in place to compare investments to the
guidelines given to fund managers by the scheme trustees. Originally
designed to ensure that guidelines such as restrictions on specific
companies, sectors or instrument types, such systems can be extended
to cover the SRI policies.
In simple terms, the fund manager
purchases a security on behalf of the scheme and transmits the details
to the custodian in the usual - normally electronic - way. As the
instruction passes through the custodian's systems it is compared to
the guidelines and flagged if it appears to breach the stated policy.
Such potential breaches are reported to the fund manager, the scheme,
or both. These systems serve to police possible indiscretions, not
prevent them.
The global marketplace has set the tone for fund administration
services. Fund structure diversity and complexity, evolving
regulations - not to mention underlying shareholder expectations -
have recast the service formula. Rapid growth in trading complexity
and volume - with shorter settlement times and higher volumes in more
diverse markets - has added increased data management
responsibilities. Along the way, the changing, consolidated, asset
management industry landscape has pointed up the need for fund
administrators capable of operating on a global, cost efficient,
common securities processing services platform.
Technology neatly enhances the service objectives of funds
administration to:
- create fund valuations in order to accurately meet global
demands, multiple daily net asset value and fund closing deadlines;
- capture portfolio transaction information using a variety of
methods globally;
- provide data and reporting back to clients, investment advisers,
regulators, external information services, and shareholders within
specified time frames.
Technology has become the tool to manage changes in the securities
industry effectively, from the initial portfolio manager's investment
decision to the method of information dissemination to shareholders.
It is technology, that has enabled the development of the services and
platforms to satiate the global market requirements for real time 24/7
browser based administrative functionalities - for example we at The
Bank of New York rolling our European reporting and information
solutions for Internet delivery.
These services are ready, right now, to be leveraged and exploited to
the benefit of the UK fund management industry in its pursuit of SRI
or any other form of corporate governance or compliance. UK
institutions are set once again to reap the cost and efficiency
benefits of investment and technology spend by the global custodians.
Combined with the expertise, care and knowledge of relationship
management teams, this presents the UK industry with a prescient
solution to its potential SRI driven monitoring need.
David Batten is managing director at The
Bank of New York.
Pensions Week
3 July, 2000
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