As it prepares for new sustainability-focused policies in its industry, a leading wealth manager in the Netherlands has tapped into Varrlyn and 4ESG Consulting for support. By bringing together regulatory expertise, industry knowledge and an established track record, the two consultancies played key roles in the successful transition.
More than ever, asset managers are under public pressure to make sustainability transparent. Amid concerns that investments could have negative environmental, social or governance (ESG) impacts, regulators are working to ensure industry players are compliant.
To this end, the EU has introduced new legislation under the Sustainable Finance Disclosure Regulation (SFDR) – and the associated taxonomy regulation – to oblige asset managers to provide information on the sustainability of funds in their prospectuses.
However, preparing for these major regulatory changes requires “a lot more effort than you might think,” says Martin Defauwes, co-founder of Varrlyn, a specialist financial services consultancy. “Policies and procedures have to be adjusted, employees informed and trained, systems adapted and new ESG data providers commissioned and connected. In other words: a huge operation.”
Companies are facing operational upheaval to meet these demands – and Varrlyn was recently recruited by a well-known wealth management firm in the Netherlands to support the regulatory transition.
But while Varrlyn has technical expertise and industry experience related to financial institutions and their best practices, the consultancy found itself in an area outside of its usual area of expertise. In search of deep expertise in ESG and SFDR, the company decided to broaden its approach and partner with another consulting firm: 4ESG Consulting.
What should I do?
Defauwes recalls, “Usually the briefing from the client is, ‘We’re going to do that. Can you help us build, implement and test?’ But here was the question: “What exactly is to be done?” This legislation is completely new and requires very specific knowledge. For this reason we decided to look for another party that has this knowledge in-house. 4ESG Consulting turned out to be the perfect match.”
Founded in 2020, 4ESG Consulting emerged from four partners with complementary expertise in regulatory implementation, legal expertise and sustainable investing. The boutique focuses on helping clients achieve sustainable ambitions and comply with sustainability laws.
Varrlyn and 4ESG started the project – primarily by examining what exactly needed to be done. According to Defauwes, 4ESG co-founder Joost Prince “defined the contours” for regulatory implementation – before the Varrlyns project team built on it.
Above all, 4ESG Consulting clarified the far-reaching implications of the new legislation for the entire business chain around an asset manager – which was not initially clear to the asset managers.
“Think about marketing and communication, but also agreements with customers about their ambitions in relation to the SFDR and taxonomy legislation,” explains Prince. “These ambitions must in turn be translated into the investment policy of portfolio management. So the investment process will also change.”
Despite 4ESG’s best plans, however, any organization can be paralyzed by the failure to get buy-in from shop floor employees. Therefore, as SFDR’s first deadline drew nearer, it was clear that mobilizing the many staff affected by the new legislation would be key to the project’s success.
Crucial to this was a sense of urgency at all levels – and this is where Varrlyn’s people management expertise came into play. Defauwes notes, “We have helped wealth managers and other stakeholders understand the change and its implications, and then look further ahead and build on the future needs of SFDR.”
“You can’t do that when you’re managing your portfolio all day, it takes a concerted effort. At some point we will leave and then the employees will have to do it themselves.”
In the end, with the help of Varrlyn and 4ESG Consulting, the client managed to meet SFDR’s first deadline. Although the wealth manager met Level 1 of the regulations, that was far from the end of the project. Level 2 is coming – and with it comes a new set of challenges; not least because its “technical standards” are not yet complete. Originally, the Stage 2 deadline was the first day of 2022 – and the ongoing uncertainty left many companies feeling unprepared.
“Although the project team is able to bring a lot of clarity to the new legislation and its implications, uncertainty remains an important factor in the process,” says Defauwes. “You could compare it to driving at high speed through dense fog.”
In the meantime, the EU has postponed the implementation deadline for Level 2. Now set for January 1, 2023, wealth managers have a brief respite when it comes to regulatory pressures. However, Defauwes argues that sitting back would be dangerous – even if companies were more comfortable meeting that specific deadline.
“The SFDR is just the beginning,” he warns. “Of course we’ve seen a plethora of new regulations over the past decade to prevent a repeat of the 2008 financial crisis, but this sustainability legislation is even more important. This goes far beyond a financial issue: literally the entire planet is at stake. So here too, many new regulations will follow and the impact will be far-reaching.”
Following the success of their collaboration for this first major wealth manager, Varrlyn and 4ESG Consulting now plan to join forces to help other financial institutions navigate these sweeping changes. Company executives believe their combined expertise can quickly deliver great value, which is important when dealing with regulatory deadlines.
“Our strength is that we complement each other very well,” concludes Prince. “Varrlyn has the deep technical expertise and industry experience, and we bring the expertise in sustainability and legislation and implementation. Together we have a clear advantage here compared to other consulting firms – small as well as large parties.”