Introduction of EFAMA President, Sandro Pierri, for the Investment Management Forum 2023

It's a great pleasure to see the room full, and I'm looking forward to what I think are going to be two very interesting days on topics which are quite central to a well-functioning fund and asset management industry. On behalf of the EFAMA team, we're very proud to present again what I think is a first-class line of speakers and a very diverse program, which hopefully will spark interest and inspire all of you. Before starting, I want to thank our media partners and our sponsors for their support, and also the EFAMA team for organizing the event and making this possible. Before letting the day go through the schedule, I want to make a few remarks to set the scene from an industry perspective. I want to start from what I think is a view on the macro context we're in right now, because we think we are in a very different setting than in the last few years. Everyone is talking about the sustainability transition, but the reality is that in the next few years we're going to face what I call the multiple transition. It's probably the first time since the end of the Second World War that we're seeing such a significant and structural change to the economy, because we are having four transitions happening at the same time. The first one is sustainability. There's been a lot of talk, and there will be a lot of talks in the rest of the day, but just to remind a few numbers: we need an additional three and a half trillion dollars to support the net zero transition. There will be 200 million jobs created and 200 million jobs eliminated, so the importance of the just transition is going to be critical, and the role of finance is going to be critical to support this transition. It's very important that we maintain a long-term view without paying too much attention to the short-term noise in the debate on sustainability. There's of course a technological transition, and again I'm not going to spend time on that—there's a lot of hype about AI and generative AI, everyone understands why technology is important. But there's a third transition which I'm a bit surprised went a bit under the radar, which is the demographic transition. I'll just mention a few numbers here as well: global population will continue to rise to 11 billion from the current 8 billion by 2030, but this growth is actually masking a very polarized geographical outlook. We have emerging markets continuing to grow, and developed markets which are actually already declining. Europe is in the same position. If we look at the age cohort between 25 and 64, this part of the population has already been declining for a few years, which clearly will have an impact on fiscal deficit and fiscal policy of a number of member countries. The other important element on the demographic transition is that millennials are aging, and millennials will have a very different attitude to saving, investment, and consumption, which would clearly create a different macro scenario for us to interpret in order to shape some of the challenges ahead, understanding that the consumer probably will behave differently. And then there's a fourth dimension, which is the geopolitical transition. I'm not going to comment on what's happening in different parts of the world, but I think if we take a longer-term view, the balance of the world in the past 20-25 years was based on three major drivers: the first was access to cheap labor cost, that was mostly the US; the second was access to cheap energy, which was mostly Europe; and the third was access to cheap international trade, which was mostly Asia and particularly China. Now if you think about what has happened over the last few years, you will immediately realize that those three building blocks for globalization the way we have experienced are no longer in place. The old balance is over. What is going to be the new balance or the new balance of power is unknown, but clearly it's another element of disruption that we need to take into account. So it's a very unique moment. I honestly have no memory of four disruptions of that size happening simultaneously. Some of them are reinforcing, some of them are contradicting, they are strictly interlinked, and you cannot just look at one transition without thinking about all the other ones. Now why is this relevant? The outcome is going to be uncertain, but I can comfortably share with you my thoughts that there are probably three important long-term consequences of this macro scenario. The first one is that there's going to be a lot of volatility at moments of disruption. It's quite normal to see volatility, and I think volatility structurally will probably increase, which has an implication on the liquidity management of a number of instruments and products that we're discussing. The second implication is that structurally this will produce lower GDP growth in the world. Demographics will clearly have an impact on the long-term potential of the different economies, especially in the developed countries. And thirdly, inflation will be structurally higher. So in a way, we have gone in five years from lower for longer to zero forever to higher for longer, and that probably will stay with us for a little while. And why this is important for the whole economy and society at large: if we use this frame to look at our industry, this is going to be even more important. The reality is that the past 20 years I've seen the industry growing very nicely, but one leg of growth in terms of assets has been the performance of the assets we manage, so linked to equity markets mostly and fixed income as well. My view is that this leg of growth will be significantly lower going forward. So growth will be lower, competition will intensify to capture flows, and at the same time revenue margins will be under pressure because of margin pressures and the shift to passive. We'll have plenty of time to discuss that. And in a way, we'll have cost inflation, which is something we have only started to get used to over the last couple of years. So if you put this into a longer-term outlook, you see that it's probably one of the most interesting and challenging times for our industry as well. At the same time, it's also important that we remind ourselves what is the broader role that as an industry we play in society. I think we are one of the most important transmission mechanisms of capital allocation. We help investors achieve their long-term goals, and by doing so we basically provide a long-term stable source of funding for governments, for companies, and for projects. And what is the positive angle in a scenario which is a bit gloomier? The positive angle is that if we look at European household assets, only one third of those assets are what I would call professionally managed. So the long-term driver of attracting capital, of transforming savers into investors, is what's going to drive the industry going forward, and it's absolutely needed also to fund the ambitious projects that Europe as a whole has, namely the sustainability agenda and the digital transition. Given this context, I think it will be pretty obvious that it will be crucial for Europe to make significant progress towards a capital markets union that works for the people and works for the financial industry as well, to support the digital and the sustainable transition. I really would like to congratulate the Commission for the determination and efforts to move forward and for achieving good progress even in an environment which has not been easy, because probably some of the support that was expected from a number of EU capitals didn't come through. A good list of achievements have been done. Clearly, the completion of the AIFMD review on one side, the fact that the delegation framework remains largely unchanged is clearly good news for all of us. On the positive side, the introduction of a wide range of liquidity management tools is very much welcome, especially at a moment in which volatility most likely will be high, so managing liquidity will be critical. The second big achievement is ELTIF 2.0, which clearly has the potential to unlock retail money, retail investors to invest in real assets, which again is going to be another element of supporting the important policy objectives on sustainability and digital, with the right balance of investor protection rules. We're eagerly waiting for ESMA to define all the details when it comes to minimum holding periods and liquidity to make sure that the whole picture on ELTIF will be a positive one, but definitely it's a significant positive achievement. And of course the MiFID review with new momentum around the creation of a consolidated tape for ETFs and equities. So good progress has been made, but there's still quite a lot of work to be done. As we approach the next European election next summer, there are a few files which remain absolutely critically important. No one will be surprised if I start by mentioning the retail investment strategy. There's going to be a panel later discussing about it, but let me just say that in EFAMA we agree with the Commission on the objective of the retail investment strategy. We absolutely need to attract more EU savers into capital markets. We need to increase retail participation in the interest of the investors themselves, but also of course in the interest of finding additional avenues to support the different transitions. We are afraid that as it stands right now, the draft of the retail investment strategy might miss its mark, because as it stands the focus is quite significantly on the cost side, and in our view it doesn't necessarily address all the reasons why EU savers are not increasing their participation. Don't get me wrong, cost is a very important element of the equation and we don't want to escape from that conversation, but there are equally important elements to put into the mix to increase retail participation in capital markets. I will just mention a few. There's not a lot about incentives, and the importance of incentives in driving behavior from savers is absolutely critical. Incentives might even be tax incentives, which we understand is a very complex topic because it goes into the domestic policy of each member state. The second unfinished work is the ESG rating. I think the ESG rating proposal is welcome by the industry because it gives enough transparency and improves the quality of the overall ESG information. One only point which I think is important to note is that the only element of the value chain which is unregulated remains basically the data provision in general, and I think this is probably an area where we would need to re-engage again. Good progress has been made also on the CSDD, on EMIR and Euro clearing, although there are a few elements that need to be addressed. But again, the overall message that I want to pass is that good work has been done, but we need to accelerate on some of the files which are absolutely critical going forward. I hope that this conference will give an opportunity for everyone to address some of these topics in a constructive and forward-looking dialogue with policymakers, regulators, and industry participants on what the priority should be for the next EU cycle and what we need to do more collectively to accelerate the transition to a more integrated capital market. At EFAMA, we are defining our main agenda for the Commission. What we would like to see is basically four priorities for the new Commission. The first is continuing what has been done in the past: boosting retail investor participation and promoting retirement investment. The second priority should be the improvement of the sustainable finance framework to really unlock its full potential, and the SFDR review is actually probably a good opportunity to move in that direction. The third priority would be to advance a more efficient, stable, and competitive capital market in Europe. And then lastly, make competitiveness a central element of all EU policy, not only for asset management but more broadly speaking. I think over the next couple of days, today and tomorrow, there will be a number of keynote speakers and we'll have plenty of opportunities to explore, debate, agree, disagree on whether these are the right priorities. Let me get to the conclusion. On one side, I just want to pass a few messages. The first is that the asset management industry is a key component in capital allocation, and I think it's quite crucial that we work collectively and constructively with policymakers and regulators to understand how we can on one side do the right things for our clients and our end investors, but also support the policy objectives that the Commission and the new Parliament will have. I think the second message is that the asset management industry overall is in good shape. I think we have continued to grow. The level of quality of the staff employed by our industry and the professionalism in managing our client savings has increased significantly over the last 20 years. So I think the starting point is really very good. But I think it's absolutely critical in my view that on one side, the European industry becomes more competitive even on a global scale. Our business by nature is global, and we need to have global champions which are European in nature to make sure that this will give us economies of scale and will favor some of the policy objectives. If I can just leave with a few recommendations that could be debated in the next few panels: from a regulatory perspective, we would like to see predictability and stability of the regulatory framework. We're not against regulation; actually regulation is absolutely crucial, and we welcome the constructive dialogue we have had over the last few years, but stability and predictability are absolutely key. The second element that we would like to see is coherence between the different pieces of regulation. I'll just make one small example: when we look at the retail investment strategy, which clearly goes more in the direction of favoring passive instruments, how do we reconcile that with the claim that we need to support the green transition? So this is an element of coherence that I think needs to be taken into account in the upcoming weeks and months. And then the third and my last recommendation, and this is mostly for regulators and policymakers, it's absolutely crucial that the asset management industry will continue to thrive to support the policy objectives. I'm going back to our broader role as a transmission mechanism for capital allocation, and we need to have a strong asset management industry to make it possible.