ESG advisory firm, MainStreet Partners (MSP), has launched a product and service solution to support the fund buyer segment of the market to meet the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements’ (SDR) labelling regime, which comes into effect on 31 July.
Fund buyers such as discretionary fund managers, model portfolio service providers and wealth managers are “in need of support” to meet the new labelling regime, and can’t afford to engage in “an ostrich-like denial” about the SDR transition, according to MSP.
The Fund Sustainability Due Diligence report, therefore, is designed to help buyers define an absolute measure of sustainability for the assets they invest in, alongside how to evidence the sustainability performance of those funds, as outlined by the SDR rules.
It consists of a detailed qualitative and quantitative output resulting from MainStreet’s detailed Sustainability Due Diligence Assessment Process. This includes fund manager interviews and deep analysis of all fund documentation and portfolio holdings to derive a 1-5 ESG Rating.
Funds with a 4 or above rating are eligible to receive a formal letter of Certification, outlining that the fund has met the SDR standards set out by the FCA, which can be shared publicly with investors or more widely by the client.
Jacob Kasaka, research associate at MainStreet Partners, explained: “A particular challenge for fund buyers is how to define an absolute measure of sustainability for each fund and then measure and monitor the assets sustainability performance. Some wealth managers are looking to rely on the underlying fund labels with a ‘sum of the parts’ approach, while some wish to perform ‘look-through’ on portfolios to analyse each underlying security.”
But both of these approaches are misaligned with the spirit of the regime, according to Kasaka.
“They can be cumbersome to perform and can feel overwhelming for fund buyers to process, let alone to commit to operationalising. In addition, a requirement of SDR is that fund buyers and asset managers provide an independent assessment of the absolute measure of sustainability. Taken together, this is a huge compliance headache that we aim to solve with our dual offering of an independent, experienced and qualified assessment alongside the new Fund Sustainability Due Diligence Report for asset managers and fund buyers.”
MSP added asset managers running sustainability strategies may have ESG teams directly involved in investment processes, which would fail the independent criteria. Conversely, asset managers have independent risk and control functions that may not have adequate ESG expertise to assess the sustainability criteria of investment strategies.
The reporting mechanism is also designed for multiple different applications, including as an additional input into screening and compliance frameworks; as a supplement to existing due diligence; or as a way to create a new, absolute standard by combining the depth and breadth of all ESG Fund Research to frame a bespoke, sustainable investment process for fund buyers.
