New UK rules, designed in part to remove the problem of "greenwashing," mean that fund buyers need more, clearer and independent information to judge what is on the shelf. A firm operating in this space says its new solution will help firms navigate the territory more comfortably.

MainStreet Partners, a London-based ESG advisory and portfolio analytics firm, has launched a sustainability due diligence (SDR) market solution for fund buyers, helping them navigate a bewildering landscape. 

A new SDR labelling regime in the UK – designed to stop “greenwashing” – takes force on 31 July, with possible enforcement action coming into gear from the start of December, if required.

The firm’s Fund Sustainability Due Diligence Report includes qualitative and quantitative output, such as fund manager interviews and analysis of all fund documentation and portfolio holdings to derive a one to five ESG Rating. Funds with a four or higher rating can receive a formal letter of certification, outlining that the fund has met the SDR standards set out by the Financial Conduct Authority. This letter can be shared publicly to investors or more widely by the client.

The sector must get ready for SDR-compliant naming and marketing rules by a 2 December 2024 deadline. From that date, funds come under regulatory enforcement action, MainStreet said.

“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,” Jacob Kasaka, research associate at MainStreet Partners, said in a statement. 

“Both of these approaches are misaligned with the spirit of the regime; 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 the FCA SDR is that fund buyers and asset managers provide an independent assessment of the absolute measure of sustainability,” he said. 

“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,” Kasaka said. 

Neill Blanks, managing director at MainStreet Partners, said: “We have developed this SDR solution because there are so many fund buyers and single-strategy equity, fixed income and multi-asset portfolio managers we know of that have been struggling with how they would even begin to demonstrate the process they would follow in order to disclose this in their pre-contractual notification to the FCA.”

“It is fair to say that Europe is further along the road in terms of ESG fund regulations, but the UK has looked to raise the bar by specifically introducing a labelling regime under the Sustainability Disclosure Requirements (SDR)” Blanks told WealthBriefing. The onus is on asset managers to disclose more and more information in terms of a funds ESG credentials and provide evidence that it is delivering on any extra financial objectives. This is no longer a tick box exercise as the FCA requires both a “robust, evidence-based standard of sustainability” as well as a “high standard of due diligence” in the selection of any ESG data provider.

MainStreet is now part of Allfunds Group, the European wealth technology business. The rise of MainStreet, formed in 2008, is an example of how the rise of sustainability and ESG investing creates new business models.

MainStreet Partners was founded by former Goldman Sachs figure Rodolfo Fracassi (CEO). The firm works with  investors and distributors seeking to deliver ESG solutions. In July 2022, Allfunds agreed to buy 65 per cent of the firm, closing the deal in early 2023. In parallel, Banca Generali, a longstanding client of both firms, bought a 10 per cent in MainStreet. The firm’s management team retains a 25 per cent stake in the business.

MainStreet, which mostly works with institutional clients, is able to fulfil the role of an outsourced ESG department all the way from creating ESG policies to helping to construct Article 9 products (i.e. a fund having a sustainability objective under the European Sustainable Finance Disclosure Regulation [SFDR]).

Historically, MainStreet Partners has had a strong presence in the Italian market, but the company has grown significantly and now has clients across the UK, Europe and Asia, it said.