Scotland is Tomorrow: Developing Responsible Investing in Scotland with rTech?

Scottish Fintech has been a key highlight of Scotland’s modern economic rotation. A more sustainable, inclusive and progressive ecosystem. It is helping to change the shape and face of Scottish e-commerce and finance but has it always been changing it to be more responsible?

Despite the COVID-19 lockdown, the delayed COP26 presents a unique opportunity to reinforce  Scotland’s position as a global centre for responsible investing. In doing so Scotland competes with every other country to drive leadership and achieve United Nation Sustainable Development Goals (SDGs). Like Scottish Fintech and the formation of the Scottish National Investment Bank, developing and growing Scotland’s responsible investing landscape is a powerful way to move Scotland’s economy to something more purposeful. The key is collaboration, which stimulates innovation, which encourages inward investment, which produces change in Scotland and overseas.

May 2020 saw the launch of Ethical Finance Hub’s new report, ‘Mapping the Responsible Investing Landscape in Scotland’, which examines the responsible investment market in Scotland, looking at:

• History: the history of responsible investing with a focus on Scotland;
• Ecosystem: the composition of the Scottish responsible investment market, and the linkages between different participants;
• Taxonomy: the terms used by Scottish fund managers to describe their approaches to responsible investment; and
• Market Size: The size of the responsible investing market in Scotland, and how it compares to Ireland and the rest of the UK.

The motivation behind the report was to raise awareness and support the growth of the responsible investing market in Scotland. Having engaged with a number of stakeholders, as well as undertaken internal desk-based research, it was apparent that, whilst data on the sector exists for the UK as a whole, there was little or nothing specific to Scotland available. A link to the report can be found here: https://www.ethicalfinancehub.org/investingscotland2020/.

The report sets out the following call to action:

“Across the globe individuals, organisations and governments are starting to move from talk to collective action as we strive to achieve inclusive economic growth without depleting natural resources. It is now widely recognised that the financial services sector has a fundamental role to play in delivering universally supported targets such as the Paris Agreement and the SDGs. However, despite its potential, the current financial system can be a cause of, rather than a solution to, some of the pressing challenges our planet and its people currently face. In trying to address this predicament Scotland is reflecting on its heritage and seeking to emerge as a leading centre for a new financial paradigm that looks beyond profit and shareholder value to deliver social, economic or environmental impact as well as financial returns.”

In parallel Scottish Fintech can now boast over 120 Fintechs, connected with 15 universities, 16 tech spaces, accelerators and incubators. The conditions are fertile for cross pollination between responsible investing initiatives and Fintech. Yet Scottish Fintech and Scottish Asset Management are, at best, acquaintances rather than partners driving true innovation in responsible investment. Only by linking the success and innovation of Scottish Fintech with the opportunity in responsible investing can Scotland truly compete and succeed as a global leader. Bluntly put, Scottish asset managers and asset owners are missing a step in utilising the talent within Scottish Fintech.

Indeed a key observation in the report was the lack of collaboration between Scottish Fintech and Scottish asset managers in creating new solutions to expand investment, improve data and clarify the taxonomy (the universe of terminology). This is totally in keeping with what I set out as a ‘New Fund Order’, the enablement and transformation of asset management through Fintech.

Stephen Ingledew, Chief Executive at FinTech Scotland said:

"Fintech innovation in asset management and capital markets is a fast emerging trend with a growing number of fintechs in Scotland developing innovative propositions to help the sector be more efficient and deliver better outcomes to investors. THis is being boosted by Scotland attracting many international fintech firms for example Agrud from Singapore and Actelligent from Hong Kong, who are attracted to Scotland  because of university research capabilities and highly qualified students and professionals."

The Scottish Asset Management Market

With £8 trillion AUM (as at end of 2019) the UK is currently the second largest global centre for asset management after the United States. Within the UK, Scotland is the second largest financial services centre after London, and includes the headquarters of Aberdeen Standard Investments - the largest active manager in the UK with a total AUM of £525 billion as of June 2019. Scotland is also a growing centre for fund administration (also referred to as ‘asset servicing’), with strong corporate links with firms based in London and overseas.

Today, asset managers in Scotland include: Aberdeen Standard Investments, Aberforth Partners, Amati Global Investors, Ardstone Capital, Baillie Gifford, Blue Planet Investment Management, Cadence Investment Partners, Cameron Hume, Castlebay Investment Partners, Circularity Capital, Cornelian Asset Managers, Dalmore Capital, Dundas Global Partners, Edinburgh Partners, Kames Capital, Martin Currie, Panoramic Growth Equity, Pentech, Revera Asset Management, RM funds, Saracen Fund Managers, Stewart Investors, SVM Asset Management, Walter Scott & Partners and Valu-Trac. The following are now subsidiaries of larger asset managers based elsewhere: Kames Capital (Aegon Asset Management), Martin Currie (Legg Mason/Franklin Templeton), Edinburgh Partners (Franklin Templeton) and Walter Scott & Partners (BNY Mellon). Firms originally founded in Scotland, like Newton (also part of BNY), still retain a Scottish presence.

In addition, a number of asset managers headquartered elsewhere have branch offices in Scotland including: Liontrust Asset Management, Investec, Janus Henderson Asset Management, Franklin Templeton, BlackRock and Barclays. Lastly there are a number of smaller boutique firms, many of which straddle fund management and financial advice such as; Alan Steel Asset Management, Balmoral Asset Management, Charlotte Square Investment Managers, KPW Investments, Murray Asset Management, Odysseus Capital Management, Par Equity, Rossie House Investment Management, Rutherford Asset Management, Social Investment Scotland, TCAM and Trafford.  Together these asset managers manage a mixture of open-end, mandates and closed-end funds for domestic and overseas investors, across a broad gamut of asset classes. The vast majority noted above (if not all) are categorised as ‘active managers’ (that is, they do not track an index). Currently there are no Exchange Traded Fund (ETF) or ‘passive’ (index tracking) providers based in Scotland.

Fintech Innovation is Happening but not Everywhere

We see more innovation in the asset servicing part of the market but again could grow significantly from here. Currently Scotland does not have any investment exchanges upon which to trade assets. Currencies are traded without a centralised location, rather the FOREX market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks). Scotland has no central clearing companies; for asset managers, the main firms that serve the UK are Euroclear, Clearstream, LCH Clearnet and Calastone. All are based in London or overseas. Similarly all of the large global custodians like State Street, RBC, BNY and Blackrock (that control >90% of the market) centralise their custody operations outside of Scotland. Scottish stock brokers include Redmayne Bentley, Speirs and Jeffries (acquired by Rathbones in 2018) and StockTrade. However the majority of brokerage is controlled by large investment banks like Morgan Stanley, JP Morgan and Goldman Sachs outside of Scotland.

Meanwhile smaller providers like Valu-Trac, based in Inverness, and Multrees Investment Services, based in Edinburgh, offer a range of fund management, administration, custody and back office services. A number of asset managers (e.g. JP Morgan, Morgan Stanley, Blackrock) also base their asset servicing and technology operations in Edinburgh and Glasgow. Computershare is a global leader in financial services and data management, working with around 16,000 global clients and their 125 million customers and having an established operation in Scotland providing relationship management and registry services to around 150 listed companies in Scotland and beyond.

The analysis of the Scottish responsible investing market can be summarised in the following table of strengths, weaknesses, opportunities and threats.

Fig. Extract ‘Mapping the Responsible Investing Landscape in Scotland’.

Page 55: ‘SWOT Analysis’:

Conclusion: A Missed Opportunity

This innovation is not being replicated in the front and mid office of asset managers or asset owners and here the opportunity arises. Scotland lacks many of the traditional levers to stimulate responsible investment. This stymies the size the market could grow to. It also presents as a missed opportunity for Scottish Fintech. The goal is encouraging external investment into Scotland through asset management and asset owners. In doing so to become a global headquarters for responsible investment. Developing technology solutions and platforms to transplant these deficiencies calls on Fintech investment. The dawn of ‘rTech’, responsible and sustainable Technology, with it the ‘New Fund Order’ is set to becoming increasingly Green.

JB Beckett, Consultant, Ethical Finance Hub, Global Ethical Finance Initiative #GEFI #newfundorder #fintechscotland #scotlandisnow #scotlandistomorrow

Co-Author ‘Mapping the Responsible Investing Landscape in Scotland’

Author ‘New Fund Order 2.0 A Digital Resurrection’

Co-Author: ‘The WealthTec Book’, ‘AI Book’ and ‘Paytech Book’

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