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Is the Cloud a systemic technology risk blind spot?

By
Ian Rycott
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PJ Di Giammarino, CEO, JWG

JWG, the regulatory think tank, has published a research paper ‘Risk control for a digitized financial sector’ which claims to identify a large systemic technology risk blind spot which regulators must take the lead in addressing.

JWG’s CEO, PJ Di Giammarino, commented, “Can a bank run its lending portfolio without loan data? Catastrophic data loss is the big risk to financial services that firms’ and regulators’ radars are just starting to register but is growing fast as the industry shifts infrastructure and data into the cloud.”

The paper, which incorporates findings from JWG’s RegTech 2.0 conference and dozens of discussions with regulators, regulated and academia builds on 10 years of research into regulation implemented since the global financial crisis. It found that cloud use had added systemic technology risks (STRs) to the financial sector. JWG notes that STRs reside off balance sheet and there is no way to quantify them – leaving the market with a large blind spot. While regulators have created discrete tick boxes for a firm’s data and IT management help understand STRs, there is no prescribed method of aggregating the risk factors.

“We believe risk measures like ‘G’ in Environmental, Social and Governance (ESG) can be used to quantify RegTech risks and create the incentives for firms to invest in safer technology,” the authors wrote. “The size of the prize is significant, and the benefits already proven in collaboration with regulators. The introduction of these standards will not be easy. For this approach to succeed, the risk experts will need to engage with the SMEs to establish standards for ‘good RegTech’. These disparate communities do not naturally sit together but can be incentivised to do so if the regulators take the lead and convene the discussion. As evidenced by COVID-19 BCP plans, STRs are real, and have been building for decades. The industry needs to move quickly to gather the right stakeholders and fast-track this discussion in advance of the Great Infrastructure Crisis (GIC)”

Moving forwards, JWG says it will frame the debate on appropriate next steps, engage the key stakeholders and help define a path for action.

Di Giammarino continued, “Regulators must bring the industry to the table to think more deeply about the value of data to their enterprise and how to account for the risks. This paper is a call to action for regulators, regulated and technology providers to debate a digital risk control framework before we find financial services embroiled in a great infrastructure crisis.”

Francis Gross, senior advisor to the European Central Bank (ECB)

Francis Gross, senior advisor to the European Central Bank (ECB), speaking in a personal capacity said, “In a hyper-networked world, technology itself generates risks which the current frameworks and cultures are ill-equipped to identify and address. Industry and authorities need to understand and accept that a collective problem is emerging and that we need to address it together in a comprehensive manner. Public and private sector strategies must align on common solutions, such as infrastructures, informed by further independent study. This report offers useful findings which could inform further efforts.”

Those interested in joining in are asked to contact pj@jwg-it.eu.

©The DESK & Best Execution 2020

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Data Science on the Buy Side

By
Creating Digital
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Gary Collier, CTO of Man Group Alpha Technology, and Hinesh Kalian, Director of Data Science, Man Group, discuss the state of data science on the buy side, spanning the evolution, current challenges and the future outlook.

The podcast is moderated by Global Trading Editor Terry Flanagan.

European Women in Finance: Nichola Hunter, building fixed income businesses

By
Lynn Strongin Dodds
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Shanny Basar talks to Nichola Hunter, head of rates at MarketAxess about leading a start-up, becoming an acquisition target and the growth of electronic fixed income trading.

Nichola Hunter’s career advice is to be unafraid of taking a risk. Her decision to turn down a job at a big bank and join a start-up ultimately led to her appointment as chief executive of LiquidityEdge.

The electronic venue for trading US Treasuries was acquired last year for $150m by MarketAxess, which provides an electronic trading platform, market data and post-trade services for fixed income. The business now operates as MarketAxess Rates and Hunter is head of rates.

The acquisition was completed in November last year, just a few months before Covid-19 led to staff having to work from home.

Hunter said: “We delivered the first phase of the integration in May despite the lockdown. MarketAxess clients can access LiquidityEdge streams and straight-through-processing for US Treasuries.”

LiquidityEdge was launched in 2015 to offer a bespoke electronic trading ecosystem for US treasuries. Liquidity providers create different streams after analysing consumer flow in order to facilitate trading. As a result, each consumer is connected to the appropriate liquidity provider and receives a customised order book for their individual trading strategy.

When MarketAxess clients were trading corporate bonds, there could be a time delay between executing the bond and the hedging US Treasury trade, leading to a risk that the price could move and increase the cost of execution. After delivering the integration which allows clients to seamlessly transact their corporate bond trade and Treasury hedge at the same time, Hunter has further growth ambitions.

“We are building a European rates business over the next six to 12 months,” said Hunter. “We will be using the MarketAxess platform but adding functionality from the US Treasury market such as an order book and request-for-quote protocols.”

She continued there is also an opportunity for streaming and Open Trading in the rates business. MarketAxess’ Open Trading model operates on an all-to-all basis allowing multiple parties in a network to come together to trade, rather than the traditional model of only banks supplying liquidity to the buy side.

In addition, Hunter expects electronic trading volumes to continue to grow in fixed income.

“On-the-run US Treasuries are 90% electronic but other deep off-the-run and less liquid bonds, and parts of credit, still provide massive opportunities for electronification,” she added. “The pandemic crisis has proved the benefits of electronic trading beyond a doubt and pushed the market to an inflection point.”

For example, during the crisis there was a liquidity squeeze in the US Treasury market.

“MarketAxess Rates has a diverse mix of liquidity providers, so March was a record month despite spreads widening and the order book thinning out,” said Hunter.

Rick McVey, chairman and chief executive of MarketAxess, said during the firm’s first quarter results call that credit spreads widened in March, especially in high-yield and emerging markets. However, credit trading volumes reached record levels and electronic trading market share on MarketAxess increased.

MarketAxess also reached record estimated market share for both high-grade and high-yield bonds in the second quarter. McVey said: “Estimated transaction cost savings delivered back to our clients reached an all-time high, with client savings exceeding company revenue for the second quarter in a row. We are encouraged by the breadth of volume and market share gains across all credit products and geographic regions, leading to robust revenue and earnings growth.”

Career path
Hunter has a Masters in Politics and International Relations from the University of Aberdeen and joined the HSBC graduate training programme for two years.

She began her career in Global Transaction Services at ABN Amro Bank in the Netherlands before becoming head of client services at EBS, the electronic foreign exchange trading venue. In 2006 EBS was acquired by inter-dealer broker ICAP and Hunter eventually became co-head of EBS Market.

Hunter said: “I left ICAP after 12 years and for the first time in my career took a significant risk. My advice is to not be afraid of taking a risk.”

While she was on gardening leave she helped David Rutter launch LiquidityEdge. As a result, she agreed to become chief operating officer of LiquidityEdge rather than accepting ‘the safer’ position as COO of a foreign exchange business line at a large bank.

“I thought I would never have another chance to start a firm from scratch and I had the opportunity to work for a mentor and boss that I respected in an area that I Ioved,” said Hunter.

In May 2018 Hunter became chief executive of LiquidityEdge after three years as COO.

“I had the classic imposter syndrome as a woman but it was a great opportunity,” she added. “I had already been running the business but had to learn different skills as a CEO, especially when we became an acquisition target.”

Women in technology
Hunter said: “I never thought of being a woman in technology but I do believe many of us are suited to start-ups as we take a broader, more empathetic view of the whole business.”

She highlighted some progress, as there are a lot more women in finance and technology than when Hunter began her career 25 years ago.

Hunter gave the example of women reaching senior positions – such as Adena Friedman, president and chief executive of Nasdaq, and Stacey Cunningham, president of the New York Stock Exchange.

However, she also said technology is the future of the industry and finance needs to do a better job of targeting girls in schools and colleges. “We also need to support them early in their careers so they do not leave,” she added.

Hunter continued that the industry needs to support diversity of all kinds in order to attract the best young people.

“Companies need to demonstrate they have taken action, rather than just paying lip service, and our CEO has already made a strong commitment by investing in new recruitment initiatives and to enhancing the diversity of the board,” she said.

Last month MarketAxess announced the election of Kourtney Gibson to its board of directors. Gibson is president of Loop Capital Markets, one of the largest privately-held investment banking, brokerage and advisory firms headquartered in the U.S. She started with Loop Capital in 1997 as an intern and rose to become head of both the firm’s equity and taxable fixed income divisions.

Hunter concluded that women need to be careful of not becoming the ‘capable girl’ and of not being remunerated properly.

She added: “You don’t have to be a perfect fit to apply for a job but just work hard and be passionate.”

©MarketsMedia 2020

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IF YOU’D LIKE TO NOMINATE NICHOLA (OR ANYONE ELSE) FOR ONE OF THE EUROPEAN WOMEN IN FINANCE AWARDS PLEASE CLICK HERE

 

Investment opportunities in a low rate world

By
Ian Rycott
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Mark Haefele, CIO Global Wealth Management, UBS

Mark Haefele, chief investment officer for Global Wealth Management at UBS has provided guidance, alongside a team of strategists, on where investment opportunities exist in a low rate world.

They wrote that cash and the safest bonds are likely to deliver negative real returns for the foreseeable future, posing a challenge for investors looking to earn income and manage portfolio volatility. Consequently they have made the following recommendations:

Search for income. “Credit spreads have tightened, but we still see value in credit as a means of income generation. We like US investment grade and high yield bonds, USD-denominated emerging market sovereign bonds, European crossover bonds, green bonds, and Asia high yield bonds. We also highlight opportunities in high-dividend-paying stocks. While we expect dividend cuts as a result of Covid-19 (more so in Europe than the US), history suggests that dividend-paying stocks tend to have defensive characteristics. We recommend using a selective approach that identifies companies with attractive, relatively high dividends that we expect to be sustainable.”

Gold. “Gold has been one of the best-performing assets this year and its qualities as a diversifier in a low-rate world have shone as the US election approaches, US-China tensions flare and coronavirus concerns persist. While we think gold will continue to be supported by safe-haven demand, in our view the primary drivers of the gold price are its negative correlation to real interest rates and the dollar. We expect the dollar to weaken further and for real rates to remain low, and so we see further upside for gold.”

Alternative asset classes. “For those with a longer time horizon, allocating a portion of portfolios to an illiquid asset class, such as private markets, can allow investors to harvest liquidity premiums and enhance returns. The best vintages for private equity firms have often coincided with dislocations in public equity markets, for example in the years 2001 and 2008. We believe the current Covid-19 crisis may also offer an attractive entry point for long-term investors seeking greater exposure to private markets. As well as considering these means of enhancing portfolio income, investors should also consider the appropriate level for cash holdings. Our ‘liquidity, longevity, legacy’ (3L) approach suggests investors should set aside two to five years’ worth of net expenses in cash and high-quality bonds.”

©Best Execution & TheDESK 2020

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GT Podcast Episode 5: Emerging Markets Investor Sentiment

By
GlobalTrading
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Dr. Murat Ulgen, Global Head of Emerging Markets Research at HSBC, discusses HSBC’s newly launched EM Sentiment Survey with GlobalTrading Editor Terry Flanagan.  

Women in Trading Webinar: Challenges, Opportunities and the Road Ahead (REPLAY)

By
GlobalTrading
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This webinar focused on senior women in institutional trading: the career paths to their current roles, their achievements and aspirations, and their unique experiences as a woman in an often male-dominated industry. The webinar blended content about current challenges and opportunities for traders in capital markets, with a ‘personal touch’ that drew out the stories of the webinar guests.

Azila Abdul Aziz, CEO/Executive Director & Head of Listed Derivatives, Kenanga Futures

Susan Chan, Head of Asia and Head of EII and TLL Asia Pacific, BlackRock

Emma Quinn, Global Co-head of Equity Trading, AllianceBernstein

Jessica Morrison (MODERATOR), Co-Regional Head APAC, Head of Execution Services APAC, Virtu Financial  

Lessons from the COVID-19 Outbreak: What History Tells Us

By
joseph_pickel
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By Joseph Pickel, Vice President, Product Strategy, IPC

Joseph Pickel, IPC

Companies everywhere are beginning to pause and take stock of how they have handled the COVID-19 pandemic. It only makes sense to reflect on what has been an exceptional and intense time in order to draw lessons and plan for the future. IPC is no different. For us, the biggest lesson from the past few months is one that has echoes in military history.

We play a vital infrastructural role, one that effectively provides the nervous system for financial markets. So, we immediately knew that how we responded would be decisive not only for our own firm but also for so many others. The relationship we have with our clients is what makes military history so analogous. They depend on us, in the same way that one part of a military operation depends on another.

Take, for example, one of the more dramatic moments from World War II in the Pacific theater. In December 1944, the United States Navy’s Task Force 38 was under the command of Admiral William “Bull” Halsey. The navy’s task force operations were based on aircraft carriers, from which attacks could be launched. Halsey had been told that aweak tropical storm was approaching. But the information he received – about the location, direction and intensity of the storm – was inaccurate. On December 17th, Halsey unwittingly sailed the Third Fleet into the center of Typhoon Cobra. By the time the storm had ended the Third Feet had lost three ships, 146 aircraft and almost 800 sailors. Another 30 ships suffered major damaged. Task Force 38 was as severely battered as if it had been in a major battle.

Flash forward 75 years and it’s December 2019. A mysterious illness is first reported in Wuhan, China, while the Dow Jones is scaling all-time highs. The next month, the World Health Organization issued guidance comparing the outbreak to SARS and other respiratory pathogens. The Dow is still going strong. By mid-February, as the WHO convened a COVID-19 forum with more than 400 experts, the Dow was approaching 30,000.

What links these two stories together? Information. Having reliable, accurate information makes all the difference between plunging headlong into a disastrous situation or averting the worst of a crisis. In the case of COVID-19, the information was there, but few people were watching. Within a few weeks, the Dow would be below 18,600. Those firms that had the right information were able to plan and take appropriate measures. Those that did not, suffered badly.

IPC had no choice but to respond to the information immediately. It became clear straight away that we would have to execute our own Business Continuity Plan (BCP) and Work from Home (WFH) strategy at an unheard-of scale – all while supporting the global financial markets and the world’s largest trading intuitions. By the end of March, the company launched four BCP solutions into the market. In the weeks that followed, our company actually began to resemble a military operation. Gathering client feedback, managing supply chains, making enhancements and rolling out updates all had to be done clearly and precisely. We were certainly tested. 

Moving forward

IPC provides solutions that help the market ensure they have access to accurate information for voice and electronic trading.  While the electronic markets continued to function, it became clear that voice became even more important for markets to communicate during the worst of the pandemic. In an uncertain global trading environment, voice provided a sense of normality. Millions of people around the world have been affected by the virus. Countries, states and local governments are now reopening. We all know that the world will not go back to how it was before. But we also have learned some significant lessons. We know the importance of acting swiftly on health information. We know that we and our clients were able to survive the most demanding operational test of our lifetimes. And we know that if the pandemic worsens again, we will be ready.

AxeTrading Aims for International Growth

By
Markets Media
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AxeTrading, which aggregates fixed income liquidity for electronic trading, has joined the Bond Dealers of America to expand in the US and received funding from IFC, part of the World Bank Group, which will help growth in emerging markets.

Mark Watters, AxeTrading

Mark Watters, chief commercial officer and co-founder of AxeTrading, told Markets Media: “We have had an ambition to grow in North America for a while. We have three clients live in the US, and more are engaging, but we have never had people on the ground.”

The timing of putting people on the ground will depend on how Covid-19 develops but the firm joined the Bond Dealers of America last month.

Watters said: “Members include middle-market and regional dealers who do not have the large budgets required to build technology in- house and evolve at the pace required to compete.”

AxeTrading is not a trading venue, but instead brings together liquidity from more than 22 fixed income trading venues, into one application on a trader’s desktop. This was particularly valuable when staff were forced to work from hime due to the pandemic and had access to fewer screens than in the office.

For example, at the start of this year AxeTrading connected to UBS BondPort, the Swiss bank’s electronic execution credit smart order router, providing access to the equivalent of $30bn of daily global liquidity in credit, rates and emerging market bonds.

Emerging markets

The international growth will be funded by the closure of last month’s Series A investment round with a group of global investors.

Andi Dervishi, IFC’s global head of fintech investments, said in a statement: “We see a capital markets future where most or all fixed income securities are traded electronically, enhancing price discovery, market transparency and liquidity. AxeTrading makes access to those markets feasible and simple for small and large participants alike.”

Dervishi continued that this is even more important in emerging markets, where participants tend to be small and are unable to develop their own trading software and tools.

AxeTrading has been appointed by the Indonesia Stock Exchange to provide fixed income trading technology for the country’s bond market. In South Africa, Nedbank became the first bank to transact on the country’s ‘ETP’ government bond electronic trading platform when it launched in 2018. Nedbank and several other ETP participant banks used AxeTrader.

Watters said: “There are still venues to add on our roadmap including other markets in Asia and emerging markets where IFC has client relationships. For example, we do not have a presence in Latin America.”

He continued that electronic fixed income trading is gaining traction in Asia.

“The Chinese bond market could become the largest in the world and the Singapore Exchange is pushing electronification,” added Watters.

Data evolution 

Watters said that it is not just fixed income execution that is being digitized, but the entire value chain – from finding the relevant bonds, to making investment recommendations, through the trade lifecycle. “There has been an evolution in data,” he added.

In June AxeTrading announced a partnership with Mosaic Smart Data, which provides real-time capital markets data aggregation, normalisation and analytics using machine learning.

Matthew Hodgson, Mosaic Smart Data

Matthew Hodgson, chief executive and founder of Mosaic Smart Data, said in a statement: “In today’s fixed income markets, access to comprehensive real-time data is not just important for success but a requirement for survival. The differentiator will be how effectively firms extract all the available insights from that data and, crucially, translate them into action.”

Watters said AxeTrading will form other partnerships that provide value to clients, for example, with providers of order management systems, as the buy side is looking for more sophisticated order execution capabilities in fixed income.

The International Capital Market Association said in its corporate bond secondary market study in March this year that asset managers are looking to new approaches for sourcing liquidity as the capacity of dealers to provide liquidity is becoming more constrained and increasingly selective.  Fund managers are either becoming more sophisticated in their interaction with market makers, or through diversifying their use of trading venues and protocols.

“Accordingly, buy sides are increasingly relying on counterparty analytics, monitoring hit and quote rates of dealers across sectors and credits, as well as observing market reaction in response to a request,” added ICMA.

The report highlighted the increased reliance on automation in the trading process, both for buy-side and sell-side firms.

Electronic bond trading volumes. Source: ICMA.

“Sophisticated “rules-based”, or even algorithmic, automated processes to manage and direct orders to venues or counterparts are commonplace in equity markets and have been widely used by asset managers for many years,” added ICMA. “As technology becomes more advanced, their adoption in the fixed income space has become more prevalent, albeit mainly in the more liquid, homogenized, sovereign bond segment.”

The report said there is a burgeoning focus on the capture, analysis, and deployment of firms’ proprietary order and trading related data.

“There is a lambent alertness among both sell and buy sides that this will be the focal point for market development over the next few years, generating greater efficiencies for low-touch (liquid) trading, while providing enhanced intelligence to support the high-touch (illiquid), alpha generating sub-set of trading activity,” added ICMA. “In the case of the former, machine learning will inevitably play an increasing role, creating a more established human digital partnership to fill the traditional trading seat. For a number of interviewees’ firms this is not just informed speculation, but rather a strategic priority and a major investment of resources.”

LSEG Discusses Sale of MTS And Borsa Italiana

By
Markets Media
-

David Schwimmer, chief executive of London Stock Exchange Group, said the company has started exploratory discussions which may result in a sale of MTS, the bond trading platform, or potentially Borsa Italiana.

Schwimmer said on LSEG’s results call this morning that good progress is being made on the proposed acquisition of data provider Refinitiv.

David Schwimmer, LSE Group

He said: “We are in constructive dialogue with the European Commission during their Phase II review and commenced exploratory discussions which may result in a sale of MTS or potentially Borsa Italiana.”

MTS is an electronic bond trading platform and Refinitiv owns a stake in Tradeweb, which provides electronic markets for fixed income, derivatives and exchange-traded funds.

Kyle Voigt, an analyst at KBW, said in a report last month that the announcement of a Phase II review is not a surprise and neither are the areas of preliminary concern – the combined entity’s concentration in electronic trading of European government bonds (MTS and Tradeweb); the vertical integration of trading and clearing of interest rate derivatives (Tradeweb and LCH), and competitor access to LSE and Refinitiv data.

Voigt had expected that the most likely remedy would be a divestiture of MTS.

“A more negative outcome for LSE would be a forced divestiture of Tradeweb, but Voigt views this as a lower probability but still possible outcome,” added the report. “Voigt views Tradeweb as a key strategic asset, and the crown jewel of this transaction.”

Schwimmer continued that unconditional merger control clearances had been received in a number of other jurisdictions. CFIUS, the US committee which approves foreign investment has not raised objections and the US Department of Justice has closed its antitrust investigation of the transaction without remedies.

“We also continue to make good progress on integration planning to ensure we are ready to deliver the benefits of the transaction to our shareholders, customers and other stakeholders,” he added . “We expect to close the transaction by the end of the year or in early 2021.”

Post-trade

Post-trade revenue rose 9% from the first half of last year to £372m which Schwimmer said was driven by strong growth in LCH, the clearing business. LCH had record activity in credit default swap, foreign exchange and cash equities clearing.

SwapClear volumes. Source: LSEG

EquityClear went live with a new LSEG Technology post-trade platform in April and cleared one billion trades in the first half for the first time, a 50% increase in volume.

ForexClear is slated to launch non-deliverable options on October 1. The exchange said this will increase coverage of addressable FX products at ForexClear to approximately 18%, with $50bn average daily turnover in traded NDOs. Non-deliverable currencies are those where exchange controls make it difficult for overseas investors to make a physical cash settlement, for example, the Chinese renminbi.

Brexit

Schwimmer said the group has been preparing for all Brexit scenarios for a number of years.

The UK has left the European Union and the withdrawal agreement provides for a transition period until the end of this year, during which LCH remains an authorised CCP in the EU.

“The European Commission announced the adoption of a time-limited equivalence decision for the UK in this area and adopted EMIR 2.2 Delegated Acts which are now under the scrutiny of the European Parliament and Council,” added Schwimmer. “This forms the base for LCH to engage in the application process under EMIR 2.2 to ensure a smooth transition to being a recognised, non-EU, CCP.”

In addition other subsidiaries, UnaVista, TRADEcho and Turquoise, have already received regulatory authorisation in The Netherlands.

Information services

FTSE Russell maintained a steady market share of approximately 20% in passive assets under management benchmarked to its indices.

There is also more than $100bn passive AUM benchmarked to FTSE Russell environment, social and governance indices, which are experiencing double-digit year-on-year growth.

Income by segment. Source: LSEG.

The exchange highlighted the launch of a series of four ESG exchange-traded funds with HSBC;  the development of the FTSE TPI Climate Transition Index Series alongside The Church of England Pensions Board and the Transition Pathway Initiative.

Schwimmer said: “We have a strong ESG pipeline going into the second half, for example,  newly developed products linked to Beyond Ratings data.”

LSEG acquired Beyond Ratings, specialists in fixed income and government bond ESG solutions, last year.

Trading volumes

Secondary trading volumes. Source: LSEG.

Ethnic Diversity In Boards Boosts Performance

By
Markets Media
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The most ethnically diverse boards among the 150 largest companies in the S&P generated higher earnings per share growth than companies with the least diverse boards according to research by Vontobel Asset Management.

Sudhir Roc-Sennett, Vontobel

Sudhir Roc-Sennett, head of thought leadership & ESG at the Quality Growth Boutique of Vontobel Asset Management, told Markets Media there is a lack of data and research on ethnic diversity.

As a result Vontobel took a deep dive into every single DEF-14A filing – where companies have to make a statement on their policies regarding diversity – across the 150 largest S&P companies and the fund manager’s US holdings.

Roc-Sennett said: “People are a silent asset and a massive cost. Yet companies do not even have to report turnover figures which is where the three former investigative journalists on our team help to track down important information that, while public, isn’t easy to find.”

He continued that women are becoming successful at debiasing companies.

“However 40% of the US population are minorities while 69% of the board members for the Fortune 500 are white males,” he added.

US population vs Fortune 500 boards. Source: Vontobel.

Roc-Sennett wrote in a blog that Vontobel’s study found that the companies  with the most ethnically diverse boards, on average, achieved a higher proportion of their business in international sales and generated a higher five-year EPS growth than companies with the least diverse boards.

“When we fail diversity in our boardrooms and workforce and eliminate certain groups from well-paid or influential jobs, the costs are borne not only by society but also in diminished long-term shareholder returns,” he added.

Board Diversity. Source: Vontobel

The most diverse sectors were health care and IT, while IT was also amongst the least diverse sectors alongside real estate.

Vontobel said companies with large international business potential have more diversity at the board level while industries such as real estate tend to be more domestically focused.

“This was also reflected within the IT sector, which is over-weighted in both the top and bottom groups,” added the blog. “What we found is that the IT firms in the top group had much greater international business exposure (average for the 6 firms was 73%) than the 5 firms in the bottom 25 (45%).  Two of the bottom group’s IT firms were payments companies.”

In addition, businesses that compete on rapid innovation and were consumer-facing tended to have more diverse boards.

“Of the top 25 just over half were consumer facing, including Starbucks, Apple and Mastercard,” added Vontobel. “Within the bottom 25, just under one third directly face the consumer.”

Engagement

Roc-Sennett said the asset manager will only engage with firms where they feel they can make an impact and improve performance.

“Environmental, social and governance strategies are comparable to taking care of your personal health; you need to deal with structural problems rather than just treating symptoms when they become chronic,” he added.

For example, Vontobel has been liaising with the NY Comptroller, trustee of the New York State Common Retirement Fund, on diversity.

“The NY Comptroller has highlighted 56 large companies without a diversity policy, asking for an improved approach,” he said. “Several of these have gone to shareholder vote, including Berkshire Hathaway where they proposed a policy for recruiting directors and CEOs, and we voted alongside them on this initiative.”

Roc-Sennett concluded that diversity of thought is not only a proven driver of innovation but also of shareholder returns.

“Building out and supporting corporate diversity is not just the right thing to do – it would be madness not to,” he added.

Russell Investments

Russell Investments evaluated the return differential from asset managers who integrated ESG well into their investment practice relative to those who did not and the return from equity products with lower ESG-related risks to those with higher ESG-related risks.

Leola Ross, director, capital markets research and Ningning Wang, research analyst, said in a blog: “In both cases we found evidence that considering ESG produced a return premium.”

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