Relevant Issues (5 of 26)
- GHG Emissions
- Air Quality
- Energy Management
- Water & Wastewater Management
- Waste & Hazardous Materials Management
- Ecological Impacts
- Human Rights & Community Relations
- Customer Privacy
- Data Security
- Access & Affordability
- Product Quality & Safety
- Customer Welfare
- Selling Practices & Product Labeling The category addresses social issues that may arise from a failure to manage the transparency, accuracy, and comprehensibility of marketing statements, advertising, and labeling of products and services. It includes, but is not limited to, advertising standards and regulations, ethical and responsible marketing practices, misleading or deceptive labeling, as well as discriminatory or predatory selling and lending practices. This may include deceptive or aggressive selling practices in which incentive structures for employees could encourage the sale of products or services that are not in the best interest of customers or clients.
- Labor Practices
- Employee Health & Safety
- Employee Engagement, Diversity & Inclusion The category addresses a company’s ability to ensure that its culture and hiring and promotion practices embrace the building of a diverse and inclusive workforce that reflects the makeup of local talent pools and its customer base. It addresses the issues of discriminatory practices on the bases of race, gender, ethnicity, religion, sexual orientation, and other factors.
Business Model & Innovation
- Product Design & Lifecycle Management The category addresses incorporation of environmental, social, and governance (ESG) considerations in characteristics of products and services provided or sold by the company. It includes, but is not limited to, managing the lifecycle impacts of products and services, such as those related to packaging, distribution, use-phase resource intensity, and other environmental and social externalities that may occur during their use-phase or at the end of life. The category captures a company’s ability to address customer and societal demand for more sustainable products and services as well as to meet evolving environmental and social regulation. It does not address direct environmental or social impacts of the company’s operations nor does it address health and safety risks to consumers from product use, which are covered in other categories.
- Business Model Resilience
- Supply Chain Management
- Materials Sourcing & Efficiency
- Physical Impacts of Climate Change
Leadership & Governance
- Business Ethics The category addresses the company’s approach to managing risks and opportunities surrounding ethical conduct of business, including fraud, corruption, bribery and facilitation payments, fiduciary responsibilities, and other behavior that may have an ethical component. This includes sensitivity to business norms and standards as they shift over time, jurisdiction, and culture. It addresses the company’s ability to provide services that satisfy the highest professional and ethical standards of the industry, which means to avoid conflicts of interest, misrepresentation, bias, and negligence through training employees adequately and implementing policies and procedures to ensure employees provide services free from bias and error.
- Competitive Behavior
- Management of the Legal & Regulatory Environment
- Critical Incident Risk Management
- Systemic Risk Management The category addresses the company’s contributions to or management of systemic risks resulting from large-scale weakening or collapse of systems upon which the economy and society depend. This includes financial systems, natural resource systems, and technological systems. It addresses the mechanisms a company has in place to reduce its contributions to systemic risks and to improve safeguards that may mitigate the impacts of systemic failure. For financial institutions, the category also captures the company’s ability to absorb shocks arising from financial and economic stress and meet stricter regulatory requirements related to the complexity and interconnectedness of companies in the industry.
Disclosure Topics (industry specific) for:
Asset Management & Custody Activities
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Selling Practices & Product Labeling
Transparent Information & Fair Advice for Customers
Asset managers have legal obligations and fiduciary duties related to record keeping, operating and marketing, disclosure requirements, and prohibition of fraudulent activities. Regulations surrounding the Asset Management & Custody Activities industry are intended to align the interests of companies and their clients and to limit conflicts of interest. This alignment, coupled with the fact that most asset managers earn fees based on the amount of assets under management, provides a significant incentive for companies to provide clients with strategies that match their risk-return profiles. Despite required disclosures, companies still face significant challenges in ensuring that clients understand the nature of risks taken in investment strategies. Failure to provide services that satisfy customer expectations may result in lengthy and costly litigation, diminished trust with clients, and lower sales as a result. Enhanced disclosure on procedures or programs to provide adequate, clear, and transparent information about products and services, the regulatory violation record of employees, and the amount of fines and settlements associated with professional integrity will provide investors with an advanced understanding of how well companies manage risks associated with this issue and whether they are able to preserve long-term value for shareholders.
Employee Engagement, Diversity & Inclusion
Employee Diversity & Inclusion
Asset management and custody activities companies face a high degree of competition for skilled employees. At the same time, the industry has a low level of diversity, especially among senior roles. In recent years, considerable media attention has been focused on cases of gender discrimination involving publicly listed companies in the industry. As the industry continues to undergo rapid innovation through the introduction of more complex financial products and computerized algorithmic and high-frequency trading, the ability of companies to attract and retain skilled employees will likely be increasingly material. By ensuring gender and racial diversity throughout the organization, companies are likely to expand their candidate pools, which could lower hiring costs and improve operational efficiency. Further, evidence suggests that diverse groups of employees at asset management companies may enhance the risk-return characteristics of investment portfolios. Enhanced disclosure regarding employee gender and racial/ethnic diversity, especially when provided by employee category, will allow shareholders to assess how companies in this industry are managing the associated risks and opportunities.
Product Design & Lifecycle Management
Incorporation of Environmental, Social, and Governance Factors in Investment Management & Advisory
Asset management and custody activities companies maintain a fiduciary responsibility to their clients. These companies must therefore consider and incorporate an analysis of all material information into investment decisions, including environmental, social, and governance (ESG) factors. The process of ESG incorporation involves consideration of ESG factors in valuation, modeling, portfolio construction, proxy voting, and engagement with investees and, as a result, in investment decision-making by asset and wealth managers. As the management and use of non-financial forms of capital increasingly contribute to market value, incorporation of ESG factors in analysis of investees has become more relevant. Research has established that a company’s management of certain ESG factors can materially impact both its accounting and market returns. Therefore, deep understanding of investees’ ESG performance, integration of ESG factors in valuation and modeling, as well as engagement with investees on sustainability issues allows asset managers to generate superior returns. On the other hand, asset management and custody activities companies that fail to consider these risks and opportunities in their investment management activities could see diminished investment returns in their portfolios which would lead to reduced performance fees. Over the long term, it could result in outflow of assets under management (AUM) resulting in the loss of market share and lower management fees.
The regulatory environment surrounding the Asset Management & Custody Activities industry continues to evolve both nationally and internationally. Companies are required to adhere to a complex and often inconsistent set of rules relating to performance and conduct as well as disclosure on issues including insider trading, clearing requirements in over-the-counter derivatives markets, and tax evasion. Asset management and custody activities companies are also subject to strict legal requirements as fiduciaries or custodians of their clients. Finally, in some jurisdictions, enhanced rewards for whistleblowers may lead to an increase in the number of complaints brought to regulators. Firms that are able to ensure regulatory compliance through robust internal controls will be better positioned to build trust with clients, leading to increased revenue, and to protect shareholder value by minimizing losses incurred as a result of legal proceedings.
Systemic Risk Management
Systemic Risk Management
Asset managers and custodian banks have the potential to pose, amplify, or transmit a threat to the financial system. Liquidity, leverage, and interconnectedness of assets under management are the factors that highlight exposure to systemic risk for companies in the industry. Understanding the level of exposure to each of these factors and the narrative around management of such exposure can help investors assess companies’ performance levels on this issue. Total exposure to securities financing transactions (SFT) provides a measure of a company’s interconnectedness and the extent to which it can absorb shocks arising from economic stress, whether internal or stemming from other market participants. Moreover, secured lending and borrowing in the form of SFTs is an important source of leverage for asset managers. Meanwhile, disclosing the distribution of assets classified under broad buckets of expected liquidity allows for a more granular understanding of the underlying risk of sudden outflows, i.e., redemption risk. The regulatory environment around the issue of systemic risk in the Asset Management & Custody Activities industry is likely to continue to evolve. Companies in this industry designated by regulators as systemically important financial institutions are subject to stricter prudential regulatory standards and oversight by the central banking systems in various jurisdictions. Asset managers will likely face limitations relating to risk-based capital, leverage, liquidity, and credit exposure. In addition, firms will be required to maintain a plan for rapid and orderly dissolution in the event of financial distress. Regulatory compliance can be very costly, while the failure to meet qualitative and quantitative regulatory performance thresholds could lead to substantial penalties. To demonstrate how these risks are being managed, asset management and custody companies should enhance disclosure on key aspects of systemic risk management and their ability to meet stricter regulatory requirements.
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