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Investors must innovate to stay ahead of FCA’s SDR proposal

Investors must innovate to stay ahead of FCA’s SDR proposal

The FCA’s new sustainability disclosure requirements may prove to be a defining moment for financial services, the chief project officer at the Global Returns Project has said. 

Jack Chellman told FTAdviser the FCA’s rules, which are currently being consulted on, cannot come soon enough.

“Investors are increasingly concerned about greenwashing,” he said.

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“Looking ahead to 2023, asset managers must embrace innovative approaches to demonstrate their sustainability credentials if they are to satisfy their clients and rise to the challenge of constructing attractive, competitive funds in a changing investment landscape.”

Chellman highlighted that the new sustainability labels for funds in the UK will require more than just an ESG integration strategy for the funds to qualify.

“The industry will therefore need to embrace innovation in 2023 to rise to this challenge,” he said. 

One way asset managers could innovate and bring “intentionality” to ESG could be to incorporate not-for-profit climate companies within their investment products.

“Rather than generating financial returns, climate not-for-profits offer a powerful way to directly regenerate the planet beyond the capacity of even the most effective sustainable commercial investing initiatives,” he said. 

“Not-for-profits deliver critical climate solutions that often fall beyond the reach of market mechanisms, such as defending rainforests and marine ecosystems, or developing and upholding environmental law.”

Asset managers could contribute to these companies in a number of ways, Chellman added, including contributing directly to these companies or embedding contributions in the fee structure of a specific fund.

The best time to do this is when launching a new fund, he said.

It is important to have a rigorous methodology to ensure the companies which receive contributions are spread across all areas of the fight against climate change.

“Portfolio diversification is also crucial, and it would need to be monitored and expanded over time.

“The Global Returns Project, for example, curates the Global Returns Portfolio, a selection of some of the most effective, diverse and scalable climate not-for-profits.”

The FCA’s proposed framework marks the “dawn” of a changed investment landscape, Chellman said, rooted in accountability, transparency and the promotion of defensible sustainability claims. 

“As higher standards of investment products become the norm, it is time for investors to rethink investment strategies, looking to new ideas that allow them to embrace intentionality and truly regenerate the planet. 

“Supporting climate not-for-profits as an integral pillar of a holistic sustainable investment strategy is one such innovative approach, which picks up the gauntlet laid down by the FCA.”