In 2021 investment interest continues to grow with respect to ethics and ESG factors – experts’ findings

In 2020, despite pessimistic forecasts, capital markets did not experience a crisis of confidence, and the number of investors increased significantly. Where is the market moving and what are its current trends was discussed by market representatives at a webinar held by the CFA Society Ukraine with the support of the USAID Financial Sector Transformation Project.

Has the coronacrisis affected the trust to investing experts?

At the beginning of last year, the IMF predicted that a coronavirus pandemic would provoke a global recession in 2020, which would be worse than the one caused by the 2008-2009 financial crisis. However, at the end of the year, it became clear that the coronavirus pandemic had not harmed capital markets. “The crisis didn’t arise in the middle of the financial sector, but in response to problems in the health and social spheres. Historians will remember 2020 as an example of decisive fiscal and monetary action by governments to address social and economic issues”, Natalia Shpygotska, CFA, board member, CFA Society Ukraine and Dragon Capital analyst, said.

According to a survey conducted by the CFA Society Ukraine, Ukrainian financial and investment experts did not experience a decrease in consumer confidence in 2020 compared to 2019 (41% of respondents). At the same time, 64% of respondents believe that trust in financiers depends on the welfare of the country and trust falls during economic crises. However, the coronacrisis did not affect the trust, 55% of respondents are sure of that.

«The crises of 2008 and 2020 are fundamentally different. In 2008 the root causes were the debt burden, non-payment on the mortgage market, the opacity of over-the-counter derivatives. 12 years later, the world has taken important steps to improve regulatory legislation and the market itself has developed significantly. Weakening in monetary policy kept world capital market from falling, even stimulated growth. The development of technologies allows the market to react quickly to all events, and it is easy for a retail investor to participate in stock trading and other investment instruments”, Timur Khromayev, the Chairman of the NSSMC, said.

Has the coronacrisis affected the demand for investment services?

Demand for investment services was growing globally due to the development of modern services with low trading costs, such as Robinhood. According to the Citadel Securities (USA), in July 2020, retail investors were responsible for 20% of all market operations. At the same time, investments of retail investors in OVDPs (Internal governmental bonds) have increased in Ukraine over the past few years. And although the share of such investments is still insignificant, the fact that their profitability is already competing with deposits suggests that demand will grow. “It was also positive in 2020 that there was no significant outflow of deposits from bank accounts in contrast to the crisis of 2014-2015. This suggests that the confidence in the banking system of Ukraine has been restored since that time”, Natatia Shpygotska, CFA, added.

Over the past few years, we have seen an increase in investment interest products in all regions of Ukraine.

“Naturally, at the beginning of the year there was concern from customers, but later the number of customers not only did not decrease, but also increased. Yes, this crisis has been painful for investors, but there is a positive in that it has pushed the market to develop. We see a significant demand for remote service channels and remote transactions, so we hope for the regulator’s help in resolving this issue in the near future” Grigoriy Ovcharenko, Head of asset management ICU, said.

Demand for investment education is growing

In the summer of 2020, the CFA Society Ukraine, with the support of the USAID Financial Sector Transformation Project, launched a free educational course “Fundamentals of Finance and Investment” on the Prometheus online platform, based on the world-famous CFA Institute Investment Foundations course. “In the first month alone, more than 10,000 students registered for the course, which exceeded our optimistic forecasts”, Oleksiy Sobolev, CFA, president of the CFA Society Ukraine, recalls.

The development of the financial sector requires both the development of demand and supply of new financial instruments. «Mostly Ukrainians now use standard banking products and buying OVDPs is already considered a progressive investment. And derivative contracts, fintech products, investment recommendations based on artificial intelligence, long-term pension accounts or pension contributions to funds, inline investments in foreign assets – all of this can be a challenge and an opportunity for individual clients in the future as well as for investment professionals», Volodymyr Kuzio, Head of Non-Banking Financial Institutions, USAID Financial Sector Transformation Project, said.

Three things are important for the sustainable and safe formation of Ukrainian demand for investment:

• Organizing knowledge about the basics of investment
• Clients’ understanding of the risks and benefits of using financial instruments
• Responsibility and ethics of investment advisers for their recommendations.

«Ethics is even more important in the context of the adopted law on derivatives, which allocates unqualified investors to a separate category and increases the responsibility for recommendations for them», Volodymyr Kuzio, adds.

Why does ethics attract more and more attention?

According to the already mentioned CFA Society Ukraine survey, more than 35% of respondents said that in 2020 they began to pay more attention to ethics in their professional activities.

“Last year was a period of uncertainty: what to expect? when will the economy recover? Any depreciation of assets is very painful for investors and we have had significant concerns from clients of our pension funds. Some investors were very panicked. In such moments, it is important to be honest with investors and not to embellish the situation. Those companies that try to embellish or avoid disclosure contribute to the fact that distrust in investment management companies grows during crises”, Grigoriy Ovcharenko emphasizes.

The most effective way to improve the ethical behavior of investment professionals is to teach ethical behavior to those who are at the beginning of their careers – students and junior professionals. Therefore, in the fall of 2020, the CFA Society Ukraine, with the support of the USAID Financial Sector Transformation Project, held a student competition to address the Ethics Challenge. “More than 100 students from 16 universities solved a rather complex case from real life. Such a competition is held in many countries, but in Ukraine it took the largest number of participants in its history. Now our universities plan to make ethics part of their curricula”, Oleksiy Sobolev, CFA, says

Also in 2020, the CFA Society Ukraine, with the support of the USAID Financial Sector Transformation Project, launched the first online course “Ethics of a Financial and Investment Specialist” on the EdEra online platform. Most of its listeners are young people, but 25% of listeners are in the age group of 36-49 years, namely who are already experienced professionals.

Conscious investing as a trend that is gaining momentum

“The COVID-19 pandemic has intensified discussions on sustainable development and sustainable investment. More and more researches show a positive relationship between ESG and financial results, the value of companies. That is why the demands of investors for the management of companies of environmental and social risks, as well as the transparency of their corporate governance are growing”, Olga Teteruk, CFA, Member of the Board, CFA Society Ukraine, said.

Interest in ESG is growing in Ukraine as well both on the part of the regulator and on the part of companies. The new Corporate Governance Code, adopted in March 2020, recommends that Ukrainian companies disclose information on the development of ESG projects. The implementation of the ESG principles is not only a requirement from the outside, for example, from international financial institutions, but is a desire of management and business owners. According to a new study by the CFA Institute, the growing demand for sustainable development shows that 76% of institutional investors and 69% of retail investors are interested in ESG investments. Already one third of investment companies have an individual ESG specialist in their staff, and another third analyzes their portfolios for compliance with ESG principles.

Because of the increasing role of ESG, CFA Society Ukraine with the support of USAID “Financial Sector Transformation” made a translation of book «ESG and Responsible Institutional Investing Around the World» by Professor Pedro Matos. It was distributed to the 26 universities throughout Ukraine and provided to market regulators.

Investment prospects in Ukraine in 2021

“A significant problem in Ukraine is the lack of financial infrastructure, so we are now investing with the aid of USAID in the creation of a central depository system, clearing and exchange system. This is an urgent need and needs to be addressed quickly. The lack of such infrastructure is like the lack of a railway connection between big cities”, Timur Khromayev said.

The plans of the National Commission on Securities and Stock Market also include amendments to the Tax Code regarding transactions with derivatives, bonds, etc. “We want to equate investor transactions with municipal and corporate bonds with OVDPs transactions. If you remove the income tax, then retail investors will start investing in their region. It will also attract more retail clients to the investment market”, Timur Khromayev shares plans.

In addition, the NSSMC has sent a proposal to the relevant committees of the Verkhovna Rada to equate investment in real estate with investment in financial instruments, which will remove VAT from transactions for the purchase of primary real estate and allow investors to enter into contracts with developers directly. This will increase the reliability of real estate investments during the construction phase.

Source: CFA Society Ukraine