Expert: Neil Hill, Partner - Head of Adviser Team, Tribe Impact Capital Facilitator: Ben Wright, Chief Innovation Officer & Director of Progress, Melo
Headlines:
- The Sustainable Disclosure Requirements (SDR) regulation, designed to promote transparency in sustainable investing, poses both opportunities and challenges for financial institutions
- Sustainable Impact, Sustainable Focus, Sustainable Improvement, and Sustainable Objective all offer unique criteria and transparency levels and bring nuance to sustainable investment strategies, requiring advisers to align labels with clients' values and performance goals.
- Advisers play a vital role in guiding clients through SDR complexities, helping them understand labels and assess investments’ sustainability impact
- The impact of sustainable investing on performance and risk and challenges like concentration risk, limited diversification, and short-term underperformance underscore the importance of managing expectations, especially regarding performance volatility and long-term outcomes
- Consistent guidance from regulators and coordination among stakeholders is essential for fostering a stable and predictable environment for sustainable investing
Discussion points:
Promoting transparency and accountability through SDR compliance
The SDR regulation supports the UK’s net-zero targets by mandating transparency in financial institutions' sustainability practices. The framework is seen as a means to drive capital towards sustainable investments, though successful adoption will require clear guidelines and consistent application.
Exploring SDR labels and tailoring investment strategies
Participants examined the four SDR labels, each reflecting different sustainable investment goals. Discussion revolved around qualifying criteria, disclosure levels, and how each label could impact strategy and performance, providing a roadmap for advisers to tailor offerings to client priorities.
Empowering advisers to address client sustainability goals
Advisers are increasingly tasked with educating clients about SDR and sustainable investing. Establishing a structured process to capture and document client sustainability goals can help advisers meet diverse client preferences while balancing investment objectives and risk tolerance.
Setting realistic expectations for investment performance and risk
The group explored the potential risks and trade-offs of sustainable investing, such as concentration risk and reduced diversification. Setting client expectations about possible short-term performance impacts while emphasising a long-term view was highlighted as essential to sustainable investment success.
Adapting to regulatory changes and political influence on sustainability goals
Participants acknowledged the impact of evolving regulations and political changes on sustainable investing. Consistent regulatory guidance was noted as critical, especially as advisers and asset managers face the complexities of multi-jurisdictional compliance and the need for cross-stakeholder collaboration.
Key takeaways:
- Establish clear processes for capturing clients’ sustainability preferences, documenting discussions, and aligning recommendations to promote transparency and accountability
- Help clients navigate the complexities of sustainable investing by explaining SDR labels, sustainability criteria, and potential impacts on performance
- Set realistic expectations with clients, particularly regarding performance variability and concentration risks, and promote a long-term perspective on sustainable investment
- Remain informed of evolving regulations and political influences on sustainable investing to anticipate changes and manage potential conflicts
- Work with fund managers, consultants, and industry experts to conduct due diligence and ensure investment strategies are consistent with clients' sustainability objectives
