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Thinking beyond sustainability in wealth management. What’s the missing piece of the ‘jigsaw puzzle’ in advisers’ offering to clients? – #WorldEarthDay

This article features as part of IFA Magazine’s celebration of World Earth Day

By Yan Swiderski, Co Founder of the Global Returns Project

The start of a new financial year offers advisers an important opportunity. In the age of the Climate Crisis, we know we must abandon the old-fashioned approach to wealth management. Clients cannot afford to focus entirely on financial returns without considering environmental impacts. At the start of the new tax year, discussing clients’ goals gives advisers a chance to address climate risks and opportunities.

But these conversations cannot focus on sustainable investing alone. Even the best sustainable strategies only minimise adverse effects on the planet. Clients can actively regenerate the planet by making a small annual allocation to climate not-for-profits.

Climate not-for-profits offer a critical complement to any sustainable investment portfolio. By regenerating the planet, these organisations help make all investments less risky. They go beyond sustainability to create a symbiotic relationship between investments and the environment. Symbiosis is the new sustainability. Today, your clients can stay ahead of the curve.

The rise of sustainable investing

The costs of climate change already render traditional investment strategies untenable. But without dramatic action to tackle climate change, scientists put global warming on track to reach 5°C by 2100. One estimate concludes that at just 3.7°C, global economic damages could total $551 trillion: more than all existing wealth today.

Wealth management must innovate to protect medium and long-term returns. Many investors and advisers understand this reality and have embraced sustainable investing as a result.

By some estimates, global sustainable investing assets already total $35.3 trillion. This surge in popularity has prompted a fundamental shift in investor and adviser priorities. In a December Schroders survey, 75% of advisers described an increase in sustainable investment enquiries from their clients.

Sustainable investing’s shortcomings

As a response to the Climate Crisis, however, sustainable investing has two serious shortcomings. First, recent studies have had difficulty drawing a connection between sustainable funds and positive environmental effects.

In March, Clarity AI published a study analysing 31,000 funds. One of its most striking findings is related to funds classified under Article 8 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). These funds should be ‘fully or partly focused on environmental, social or sustainability issues’. But according to Clarity, only 3.9% of their revenue can be classified as green.

A December report from Bloomberg helps illustrates how ESG labels can so often prove inaccurate. Bloomberg found that the largest ESG rating company, MSCI, does not attempt to measure a company’s environmental effects at all.

Sustainable investing’s second shortcoming might be even more significant. Even an effective, transparent approach to sustainable investing would fail to implement many critical climate solutions.

As a market initiative, sustainable investing cannot fund non-market solutions. These include suing polluters, protecting rainforests and defending carbon-sequestering whale populations. They also include systemic solutions such as advocacy and policy work. Without these interventions, we can neither mitigate climate change nor protect medium and long-term investment returns.

From sustainability to symbiosis

This is where climate not-for-profits come in. Not-for-profits tackle the fundamental problems that sustainable investing cannot address. While these organisations do not deliver financial returns, they deliver ‘Global Returns’ – that’s our term for the enhancement and protection of the biosphere. These returns are real and identifiable. And all our investments are less risky when we enhance and protect the biosphere.

It’s time for clients to pair their sustainable portfolio with an annual allocation to climate not-for-profits. On its own, a sustainable portfolio only delays the erosion of value. Paired with not-for-profits, it creates a symbiotic relationship that makes reliable long-term returns more likely.

Climate not-for-profits regenerate the planet, yielding Global Returns. Those Global Returns help a sustainable portfolio continue delivering consistent financial returns. And a tiny proportion of those financial returns go to climate not-for-profits, allowing the cycle to begin again.

How do we make symbiosis easy for every investor? It starts with applying a fund management approach to not-for-profits. At the Global Returns Project, for example, we have assembled a portfolio of effective climate not-for-profits which we call the Global Returns Fund. We select each not-for-profit using a detailed and consistent methodology. Every six months, we use that methodology to review the portfolio again, drawing on our Technical Advisory Board’s climate expertise.

Our methodology assesses not-for-profits by their impact, scalability, networks and co-benefits. It seeks a diversity of solutions, activities, beneficiaries and geographies. It also evaluates the total range of activities our portfolio carries out.

In a few years’ time, every investor will move from sustainability to symbiosis. Reliable medium and long-term returns depend on regenerating the planet beyond the capacity of sustainable investing alone. At the start of the new tax year, advisers can keep their clients on the cutting edge of climate-savvy financial planning.

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