IN SHORT: Every retirement fund needs a trusted custodian bank, especially during times of change. As sustainability becomes essential to the bottom line, retirement funds should ensure their chosen custodian bank operates sustainably as well as offers the necessary sustainability services.
Every retirement fund needs a trusted custodian bank, especially in times of change. The past few years have seen sustainability move from a buzzword to the bottom line. How do these specialised financial institutions facilitate their and retirement funds’ good business journeys?
If your retirement fund utilises the services of a custodian bank, sustainability should be on your agenda. Custodian banks safeguard massive amounts of capital. These specialised financial institutions are custodians of your fund’s assets (cash, shares, bonds). The custodian bank itself must operate sustainably while offering sustainable services to your fund.
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Custodian banking is a risky business
To ensure their sustainability, custodian banks must prioritise risk management. These multi-faceted banks with stakeholders worldwide are exposed to operational, regulatory, compliance and transaction risks. Custodian banks also play the role of a trusted intermediary, which necessitates confidentiality and fiduciary duties.
Another key risk is cybersecurity. This requires sound data management practices by the custodian bank to ensure the privacy of clients’ information.
Failure to fulfil these duties could result in custodian banks incurring significant financial losses and reputational damage. Good corporate governance is the cornerstone of robust risk management. Against this backdrop, the board of directors of a custodian bank plays a fundamental role in ensuring the correct processes are in place, sufficient risk oversight is provided, and business is conducted ethically.
Empowering clients with sustainable services
Services provided by custodian banks evolve as investors, such as retirement funds, seek information or more in-depth analysis of new investor regulations and trends, including sustainability.
Stewardship or active ownership is a fundamental tool in a retirement fund’s approach to sustainable investing. Because retirement funds hold shares in a company, they have the right to vote on company decisions. Investors can vote against unsustainable business decisions, for example a proposed takeover of a coal mine or an investment in oil exploration. They can also vote for sustainable practices such as fair remuneration and a climate action plan.
In short, stewardship is when a retirement fund uses its influence as a shareholder to encourage good corporate behaviour in companies.
Custodian banks contribute to this stewardship role as they perform proxy voting duties on behalf of the retirement fund.
High-quality data processing and reporting by the custodian bank also foster transparency and accountability. This type of reporting is increasingly important as it provides evidence of active ownership and how seriously a retirement fund is taking its fiduciary duties and sustainability mandate.
Making ESG meaningful
Sustainable investing is high on the agenda worldwide. A company’s sustainability is often measured in terms of the environmental, social and corporate (ESG) factors.
Retirement funds that invest in a portfolio of companies often grapple with multiple ESG data providers and a general lack of standardisation.
Some custodian banks have found innovative ways to offer ESG analytics and risk monitoring. They have created easy interactive dashboards that measure numerous companies’ ESG performance against benchmarks, making sustainability data more meaningful. In this way, a custodian bank can assist retirement funds with the necessary data, metrics and tools to pursue sustainability and a financial mandate.
Sustainability is no longer a buzzword. It’s here to stay. How future-proof is your custodian bank?
Further reading
Sources
ESG Investor: Shining a Light on the ESG Universe
FasterCapital: Custodian bank: The Essential Role of Agent Banks in Custodian Services update
HSBC: The role of custodian in a sustainable world
KPMG: Cybersecurity in ESG
Nasdaq: How Are Custodian Banks Navigating Risk on a Global Stage?
PRI: Stewardship
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