Monday, May 27, 2024

The importance of robust service providers — from ESG to digital

INDOS Financial, a JTC Group company, offers independent depositary services to a wide range of alternative investment funds.

In our partner content series, AFI editor Will Wainewright sat down with Jon Masters, director and head of business development, to hear his thoughts on the industry landscape.

AFI: What is top of mind for INDOS and JTC as we begin Q2?

JM: We have always been focused on helping managers set up in the most robust way possible. That means not only choosing quality service providers which do a thorough job, but those which can help the manager beyond their remit. Firms get the most value from service providers which can think outside the box and are in tune with what is happening in the industry. Managers should look at the whole fund governance structure from service providers all the way through to the board, and make sure that they’re fit for purpose. And that they deliver value and strengthen the governance model of the fund rather than just seeing them as a regulatory requirement.

AFI: So it’s a question of adding substance, not just box-ticking.

JM: Substance is a good word. That’s what we’ve always been proponents of, when it comes to our robust depositary oversight model, which we know gives a lot of comfort to hedge fund and private equity boards. We’ve always added value — when acting for funds, we have had feedback from board directors saying: ‘You are the only depositary we hear raising matters in board meetings.’ That’s our approach. By and large, if you’ve got service providers that are robust with substance and quality, then that’s going to help you as a manager grow your product and manage your business.

AFI: Can you give a sense of how you are approaching the ESG issue?

JM: ESG is an interesting area and there is going to be a continual growing focus on it.  Managers need to position themselves clearly and consider how they represent their approach. If you take the European regulations, even a fund rated as SFDR Article 6, which is just basically low-touch ESG, still needs to report the negative impacts of the fund, via a negative impact statement. With Article 8 and 9, there’s a much more robust reporting requirement. Clearly, that’s adding to what a manager needs to report to its investors and have a robust process for ensuring compliance. If they are putting those objectives in a prospectus, it could also require the depositary to review their compliance with them as part of its role.

AFI: Are regulators taking more of an interest here?

JM: Yes, they clearly are. The SEC in particular is leading the way with fines and investigations and inspecting managers, especially if they’ve got anything ESG-related in their fund title or anything that’s likely to be misleading. In Europe, it will be more about collection of reporting through the three articles and then analysing how the managers have demonstrated through reporting that they’re fulfilling the requirements of those articles. How the European regulators react to the first submission of data will be interesting. The UK is also bringing in its SDR version, so there is a lot for managers and their funds to keep an eye on.

AFI: What is the data angle here?

JM:  The issue around data is how a manager sets themselves up to demonstrate that they are achieving the objectives or impacts that they’ve set out and whether they have made a difference in sustainable objectives. So there’s a bit of a minefield developing there, but again it’s about how you set yourselves out in a very clear, defined way that you can measure what you claim. If you’re a private equity fund, and there isn’t any ESG data on the portfolio companies, you might send out questionnaires and start measuring improvement on, say, 15 areas during the time companies are in the portfolio. We can help with that.

AFI: Is JTC well-placed on ESG?

JM: Well, transparency is everything. The logic of helping with ESG, particularly if you’re an administrator or depositary, is that you actually see the assets. It’s not as if you are sharing with another outside service provider and saying, look, can you run all these metrics on this portfolio. Within JTC we have a dedicated ESG team and can help with these issues.

AFI: How is INDOS approaching the digital challenges ahead?

JM: It is important to be prepared for what is coming down the line, particularly with developments such as asset tokenisation and much more use of the blockchain. It’s one of those areas where if you’re not considering it in a robust way, then it will creep up on you as the industry evolves. Either you haven’t taken advantage of the opportunities, or won’t be in that position to respond and make necessary changes. Digitalisation is still some way off, but you can see already that the large macro funds are taking opportunities with digital currencies.  At JTC we are already working with digital asset custodians, exchanges and investment managers looking to tokenise assets and funds.  Additionally our operational due diligence specialists, perfORM, are working with clients helping them with their choice of virtual asset service providers and other forms of due diligence in this area.

Click here for more information about INDOS Financial, a JTC Group company.