In this article, we examine how investment managers are responding to environmental challenges and heightened climate change awareness. Emphasising the significance of long-term investment considerations, we highlight the advantages of sustainable investing, including increased financial resilience and access to expanding markets.
We also explore the complexities surrounding sustainable investing, addressing issues such as greenwashing and the delicate balance between profitability and sustainability. Considering the forthcoming FCA Sustainability Disclosure Requirements (SDR), we also provide preparatory suggestions for investment firms, advocating transparent disclosures, thorough data evaluation, and strategic realignment to capitalize on sustainable opportunities.
The Changing Landscape of Investment Managers
In an era marked by increasing environmental challenges and heightened awareness of climate change, the investment managers have evolved beyond simply seeking returns and are now being called upon to consider the long-term impact of their investment decisions.
Climate change is no longer a distant threat, extreme weather events and rising global temperatures can significantly affect the performance of investments. Investing in carbon intensive industries may face increased exposure to climate related risks including regulatory changes and shifting consumer preferences.
An increasing number of investors are seeking opportunities that align with their values and ethics, with a commitment to environmental stewardship and social responsibility.
Financial Benefits of Sustainable Investment
Beyond the ethical and regulatory reasons, prioritising investment in sustainability could enhance your financial returns in the following ways:
- Longer term resilience: Sustainable and green investments may exhibit greater resilience in the face of market volatility and economic downturns, so by embracing these types of investment you may be better equipped to adapt to changing market conditions.
- Innovation and Competitive edge: Investing in sustainability provides products that cater to the growing demand for environmentally friendly solutions by investing in forward thinking companies capturing innovation in your offering.
- Access to growing markets: As global awareness of sustainability and green initiatives grows, so does the market for related products, offering exposure to expanding markets, from renewable energy to eco-friendly technology leading to substantial growth opportunities.
The Challenges of sustainable investing
Whilst the importance of sustainable investing is clear it does not come without its challenges. There is a complex landscape to navigate considering factors such as greenwashing, measuring ESG metrics and regulatory disclosure requirements. As well as the trade off between profitability and sustainability, it is crucial to strike the right balance when selected suitable investments.
FCA’s Sustainability Disclosure Requirements (SDR)
The FCA are working to build a world-leading and competitive regime, namely the Sustainability Disclosure Requirements (SDR), that will help the UK’s asset management sector thrive by improving sustainability information consumers have access to and their trust in sustainable investment products. There are three main labels proposed for sustainable investment products:
- Sustainable Focus – for products investing in assets that are environmentally or socially sustainability.
- Sustainable Improvers – for products investing in assets to improve the environmental or social sustainability over time.
- Sustainable Impact – for products investing in solutions to environmental or social problems to achieve positive, measurable real-world impact.
The final FCA policy statement is expected in Q4 2023 with it coming into effect twelve months after the publication of the final rules. However, the clarifications on greenwashing, making an environmental claim that does not exist, will come into effect immediately. Fund managers should act now to ensure any sustainability or ESG claims in marketing are clear, fair and not misleading.
Preparing for SDR Implementation
Starting your journey on the adoption of these regulatory requirements will help to mitigate the key challenges.
- Prepare to disclose – The requirements for the SDR will be similar to the principles of the ISSB Standards. Therefore, you can prepare in advance by considering the requirements and how to implement these disclosures. This should make meeting the eventual requirement less challenging and time-consuming.
- Identify the changes – Evaluate your current practices against the existing SDR requirements, identifying necessary changes in governance and data processes. When using ESG data providers, ensure that robust due diligence is carried out to ensure that the data collected is fit for purpose and protects against allegations of greenwashing.
- Embrace the opportunity – See this as a business transformation to re-evaluate your strategy, risk management, data management, and value chain to capitalise on sustainability-driven opportunities and embed sustainability into your firm’s ambitions.
Adopting these three steps will put you in a strong position to quickly align with the regulatory requirements when they are introduced and allow you to take advantage of opportunities early on to embrace a more sustainable business.
Conclusion & Next Steps
It is clear that proactive preparation and the strategic adoption of sustainable practices will be required to effectively align with the new regulatory framework proposed by the FCA, however by viewing the market shifts as opportunities for transformative growth and improved risk management, investment firms can successfully navigate the changing landscape.
For help and advice on your financial services business, please contact Sarah Hallam in the Menzies Financial Services team or contact us via the form below: