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Michael D’Arcy addressed the audience at Simmons & Simmons annual investment Symposium in London with the following speech.
I would like to start by thanking James McKnight from Simmons & Simmons for inviting me today. I had the pleasure of speaking at the opening of your offices in Dublin a few years ago and I know you have gone from strength to strength.
Benjamin Franklin reportedly said: “An investment in knowledge pays the best interest,” and these events that bring all sections of industry together are an excellent opportunity to listen to what others, policy makers, regulators and industry practitioners are saying.
Opening
I would like to give you a brief outline how the Irish funds asset management industry has developed.
We are a youthful sector that has grown from a standing start to a world-leading jurisdiction in just a few decades.
Today, the Irish funds asset management size and influence is of national importance and has expanded well beyond the Dublin docklands where its story began.
We now employ professionals living in every county on the island of Ireland and work for investors worldwide.
The sector has evolved into a leading funds jurisdiction largely as a result of the internationally delegated model.
Background
The industry started as the International Financial Services Centre (IFSC) in 1987. The Finance Act of 1986, introduced financial incentives to encourage private sector investment in the urban renewal of Dublin’s docklands area.
Soon the IFSC tax incentive zone was established with EU approval. Subsequent governments evolved this low rate into the national corporate rate of 12.5% in the 1990’s.
The headline rate is very close to the effective rate of tax with very few deductibles allowed. Investors like the fact our corporate tax rate is clear and unambiguous.
Since December 2020 all companies operating in the international financial services sector pay corporation tax at the prevailing rate of 12.5% and this remains a compelling proposition.
Ireland and 135 countries are signed to the new agreed international minimum corporate tax rate of 15%.
Today
Today, in Ireland we have a €7 trillion industry with nearly 180 companies supporting more than 34,000 jobs in every county. Local communities benefit to the tune of €14.8 billion in economic output.
Since establishment, the funds industry in Ireland has grown every year except one.
But we are not done yet.
The government’s forthcoming action plan under Ireland for Finance will look to build on those strong foundations – and the future looks promising.
Future
In tandem with Ireland’s well-documented growth for the middle and back-office servicing of internationally distributed investment funds, front-office activities have also expanded.
In the past five years alone, assets managed from Ireland have increased by almost 60 per cent – in part fuelled by Irish-based managers winning new mandates, and in part a consequence of the expanding presence of leading international firms such as Amundi, BlackRock, State Street and Mediolanum.
Since the UK decided to leave the single market following the vote on Brexit, investment asset managers have been gravitating to Ireland to access the EU. This is not a surprise as access to European markets being of primary importance to those establishing within the European Union.
This growth is reflected that in the past 28 months in the organisation I represent – the Irish Association of Investment Managers. We have doubled our membership and increased the association’s AuM from $1.3 trillion to €3.1 trillion.
Need for industry to be better understood
Therefore, we have an increasing responsibility to help shape European policy for the benefit of investors worldwide.
Part of this responsibility is ensuring that we – the practitioners from the industry – do better in explaining what our industry does and for whom.
The sector is portrayed as being only for the elite and wealthy, but this is not the case.
The large majority of these funds belong to average working pension holders and savers. This money is exceptionally well managed depending on consumers appetite for risk.
They and you are doing a very good job managing ordinary people’s money.
This message is not out there.
This disconnect might explain why the European Union has one of the highest savings rates in the world, but comparatively low investment rates. This is despite zero and in some cases negative interest rates as savings languish in deposit accounts – consumers receiving low, or no, returns at a time of high inflation.
Confidence is key to encourage an increase in pensions and savings.
I am thankful that the European Commission is aware of the importance of making progress to tackle this issue.
Delegation Model
If more savers are to be encouraged to invest their hard-earned cash into capital investments, then it is vital the regulatory landscape remains one where asset managers can access the best expertise available wherever it is located.
It is our duty to ensure policymakers understand the benefits of the Delegation Model to investors and that it will ultimately be consumers who lose most should it be undone.
Some jurisdictions may have their own reasons to push for change that may not be in the best interests of consumers everywhere and it is essential that policy-makers are aware of that.
If the current delegation model is altered, consumers will face additional costs and restricted choice with a lack of access to the best-performing thematic funds and specialist expertise that is available in different jurisdictions.
Our research shows that the delegated model is being responsibly implemented by the sector and is working well.
Is regulation working?
We must be real.
We must ask ourselves if some of those higher levels of regulatory scrutiny and oversight being brought upon the asset management industry is making a positive difference.
Higher levels of scrutiny must benefit consumers, and if it doesn’t we have to ask: “Why is it happening?”
We should not be focussed on volume of regulation.
We need to focus on the Quality of regulation.
Do we have Quality of regulation right now?
Well, when it comes to regulation of the Delegation Model it will continue to be effective for consumers and industry if left alone.
As they say – “If it ain’t broke don’t fix it.”
Sustainable Finance
The same cannot be said of regulations around Sustainable Finance.
We are operating in a landscape whereby asset managers are trying to implement regulation with one hand tied behind their backs.
The Sustainable Finance Disclosure Regulation is unclear.
EFAMA’s Director of Regulatory Policy – Vincent Ingham – himself has been recently quoted as saying that the industry still faces two major challenges.
First, a lack of comparable and reliable data from companies that funds can invest in.
Data is at the core of ESG investing and it is currently imperfect.
Second, there is the absence of a clear definition on what constitutes a sustainable investment.
He was also quoted as saying: “This absence of clear definitions in turn creates greenwashing risks and associated reputational risks for the asset management industry…So one of our hopes for 2023 is that the relevant European institutions, so essentially the European Commission, will clarify those notions and, hence, reduce legal uncertainty.”
That is all well and good, but industry is currently navigating SDFR without the essential clarity needed to know what even constitutes a sustainable investment.
Industry and regulators alike have and are showing willing – we are moving forward together but not in the same way or at the same pace.
There is too much ambiguity and with ambiguity comes uncertainty and with uncertainty comes reputational risk as investors – quite rightly -increasingly look for comprehensive and clear answers.
It is incumbent upon ESMA to say what this means.
Three-legged stool
While ESG investing has many facets it is clear that climate change and decarbonisation is an absolute priority.
This is an area where the investment management industry is responding and showing leadership.
This is evidenced by the Net Zero Asset Managers initiative which is 291 asset manager signatories representing nearly $66 trillion with the aim of achieving net zero emissions in portfolios by 2050 or sooner.
ESG assets are expected to hit $41 trillion this year. (ESG assets surpassed $35 trillion in 2020, up from $30.6 trillion in 2018, and $22.8 trillion in 2016.)
The trend is clear.
People want to invest in companies doing the right thing – despite worries of global recessions, rising interest rates, an international war between European nations in Ukraine, inflationary pressures and rising energy prices.
But, the harsh reality is that, despite increased investor appetite to make their investments work towards the achievement of a more sustainable global economy, financial services policy makers and the asset management industry alone cannot effect the climate change needed.
To implement the change needed is like a three-legged stool encompassing is like a three-legged stool encompassing asset management funds, multilateral banks and government funds contributing to projects to deal with the required carbon reduction.
This is an all or nothing phase.
Without funding from all three in the correct sectors in the correct way, climate change, global warming will be irreversible.
There is no prospect the centre will hold subsequent to the damage from extreme weather events and the likely migratory flows from Asia and Africa to Europe. These appalling scenarios with dwarf the 7 million displaced Ukrainian refugees who have left their homeland fleeing a war.
Cost of inaction
The risks of inaction are stark and well understood.
Between 2030 and 2050, climate change is expected to cause approximately 250,000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress (according to the World Health organisation).
If left unchecked, climate change could cost the global economy US$178 trillion over the next 50 years, or a 7.6% cut to global gross domestic product in the year 2070 alone.
There is a growing acceptance that it will cost less to act than NOT to do so.
Estimates from the World Bank calculate that climate inaction could reduce global GDP by at least 5 percent annually while the price of necessary action is 1 percent.
This would result in devastating human cost.
Long-term investors may get much reduced returns if the global economy is severely damaged, as is likely, by climate change.
We must face the elephant in the room – have COP 26, 27 made any real difference? We are now looking at Cop 28 and still asking much the same questions.
Ireland was the first country globally to divest public monies from the fossil fuel industry. However, while we are seeing government policy – in general – shifting to leverage the change in investor awareness they are simply not doing enough quickly enough.
Currently, governments in developed countries have not lived up to what commitments they had given at previous COPS.
We must ask the question – are COPS relevant? What was agreed in 26 was not underwritten in 27 and the clock is ticking hard climate change. The wealthy countries have not stepped in.
Achieving net zero by 2050 requires emissions to reduce by 50% by 2030 – but country pledges would currently take us to a 10% increase in emissions and result in 2.4C warming.
Tackling climate change cannot be done by asset managers on their own or with multi-lateral banks.
Everyone has to be one board.
Ireland
Despite the many challenges highlighted today, Ireland is well placed to support you – the European Investment sector.
Despite – and, perhaps, because of – Brexit, the Central Bank and our economic development agency the IDA tell us the pipeline to establish in Ireland is strong.
The Irish Government has identified the financial services, as a source for potential growth and the funds sector is projected to grow between 25 per cent and 29 per cent by 2025.
As previously mentioned, it has set out its strategic objectives and policy proposals to support this growth in its strategy for International Financial Services – Ireland for Finance.
Key growth opportunities identified in the investment funds sector include Exchange-Traded Funds, sustainable finance and, potentially, digital assets.
All island opportunity
Less known are the benefits afforded from the risk and compliance expertise available from Northern Ireland which are supplementing the skills and services in Ireland.
Northern Ireland has the highest concentration of fintech employment in the UK with one in five people working across financial services and tech.
Almost 50,000 people are employed in the financial and professional services sector and Belfast is ranked in the top three Global Fintech locations of the future.
Citi’s Belfast operation now has over 2,900 employees and both Deloitte and PwC’s Belfast centres are their largest centres in the UK outside of London. Northern Ireland is also home to a wide range of companies offering compliance technology applications with cyber security solutions.
We have a unique opportunity on the Island of Ireland. Belfast is 90 minutes from Dublin. There is genuine expectation now that the Northern Ireland Protocol will be agreed sooner rather than later.
Closing
So, while Ireland is well placed to partner with you, what we all need – and consumers deserve – is clarity.
We need clarity so we are collectively acting in the best interests of the consumer.
We need to start the conversation about quality of regulation and whether what we are being asked to do is of real benefit to consumers.
We also need to face the fact that all our work in sustainable investing will have little impact on the world’s climate crisis unless governments deliver on their promises – and quickly.
Next year, voters in the EU’s 27 member states will choose a new European Parliament and with that comes a new European Commission.
Uncertainty can have hugely damaging consequences.
We have seen how the political centre in Europe and internationally is being challenged. The question can the centre hold ? has been asked. In the last decade people with interesting backgrounds have been elected to very senior government positions.
The decisions of policy makers in tandem with regulators in tandem with the asset management industry is crucial for stability.
When consumers pensions and savings are safe and stable this leads to safe and stable jurisdictions. When the opposite happens turmoil and strife are the order of the day.
Everybody’s interests are protected when the entire asset management sector, policymakers, regulators and practitioners speak, listen and hear what each are saying.
Outcomes are always improved with dialogue.
I wish to acknowledge the work of the Central Bank of Ireland. The increased engagement with industry through the establishment of the industry stakeholder group has been huge benefit. Meeting twice a year along with the three new sub committees in Domestic, International and Innovation, the interaction between our regulatory body and industry is maturing in a positive direction. This group provides the opportunity to have open and frank discussion with consumers’ best interests at heart.
The more certainty markets have, the less likely their impact beyond the markets.
We need to ask the hard questions and be truthful in answering them even if the answer is not what we want to hear.
We cannot continue operating in a vacuum of clarity. These conversations are being held in groups like the organisation that I represent to help industry find a position.
Law firms are attempting to clarify and find an industry position. Everyone is trying to do their best but we desperately need clarity. We need it sooner than later. We need it now.
As Warren Buffet famously said: “Only when the tide goes out do you discover who has been swimming naked.”