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Northern Trust seeks fintech help for ESG

The global custodian’s tech needs are moving from the back office to the front, says its Hong Kong head.



Caroline Higgins, Northern Trust

Northern Trust is increasingly looking for fintech partners to support its work with asset managers’ front offices, says Caroline Higgins, the firm’s head of Hong Kong, Macau and Taiwan.

As a custodian, overseeing nearly $15 trillion of client assets, the firm has announced a long list of tech partners over the past year, from blockchain to forex. Most of these have touched on processing transactions and administering funds. 

“We are now looking more at front-office solutions,” Higgins said. The reason? “We need to use data science to support ESG and digital assets.”

Northern Trust provides securities and fund services to asset managers as well as asset owners, such as sovereign wealth funds or superannuation funds.

“Both asset managers and asset owners must meet new ESG regulations,” she said.

Tech partnerships

The bank’s bread and butter work is on custody, processing, administration, reporting, and middle-office outsourcing (for risk management and analytics).

It’s struck agreements with tech providers such as Robotic Oversight System for foreign-exchange processing, BlackRock for operations processing for mutual fund managers, and IHS Markit for middle-office services.

Northern Trust and acquired stakes in companies such as Essentia Analytics (behavioral science applications for allocations), Equity Data Science (cloud-based tools to support portfolio ideas) and Parilux (data management for investment teams).

It also built its own electronic forex pricing engine in Singapore.

From blockchain…

The focus this year will include more services for portfolio managers and analysts, as well as sales and distribution.

The bank has already been working in blockchain for such uses.

Last year Northern Trust worked with fintech Bond eValue to use distributed-ledger technology to enable fractionalized bond ownership and trading, including for possible retail adoption. It also partnered with Standard Chartered to launch Zodia Custody, for institutions holding cryptocurrencies.

This followed earlier pilots using blockchain to administer private-equity funds. That initiative hasn’t been deployed (Northern Trust sold the technology to vendor Broadridge) but it had been interested in using DLT to tokenize private assets, so they can be distributed more broadly. Its hedge fund clients are also investing in crypto.

…to ESG

Higgins says the big push now is to help asset managers and institutional investors with ESG.

“Integrating ESG is inherently complex, diverse, and quant-driven,” Higgins said. “It involves many rules, regulations, and interpretations. And it’s growing in Asia, so managers here need reporting off the back of assets under custody.”

The bank has been making multi-year investments into digitizing alternative asset servicing, from reading unstructured data to helping managers oversee research. But the complexity of ESG means the bank needs to work with fintechs with data science and artificial-intelligence capabilities.

Increasingly that includes looking for partners in Asia too.

This reflects a change in the asset management industry, Higgins says. Until recently, fund managers were driven by cost considerations. The fragmented nature of the region made it hard to scale technology at a regional level. But since Covid, priorities have shifted, with more managers looking at business resiliency as well as ways to generate portfolio alpha.

ESG is part of this. “Clients are all challenged by the need to fully report their ESG holdings,” she said. Many managers or asset owners invest across funds of funds or complex portfolios. “How do you look at the 50 funds you’re invested in, pull the ESG data, and get a full view? This isn’t like managing against an index, you need multiple sources of reliable data to provide a benchmark.”

The popularity of unlisted UCITs unit trusts (pan-European funds domiciled in Luxembourg or Ireland) among investors and fund managers in Hong Kong, Singapore, Korea and Taiwan adds to the complexity, because these funds don’t have the same reporting allowances.

“Specific solutions don’t always work anymore,” Higgins said. “The goals have gotten bigger.”

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