What you need to know about new sustainable fund labels
Molly Thompson, interactive investor’s sustainable investing analyst, explains what the new labels mean for investors.
12th November 2024 11:41
This year, the Financial Conduct Authority (FCA) introduced a package of measures that aim to protect retail investors and promote the sustainable economy.
The new regime is a step up in regulation to ensure that sustainable investment products do as they claim and have the evidence to back it up.
The Sustainability Disclosures Requirements (SDR) and investment labelling regime is a framework that all UK authorised companies must abide by when selling and marketing funds with sustainable characteristics to UK retail investors.
This new regulation is primarily a labelling requirement. Four new labels are being introduced: Sustainability Improver, Sustainability Focus, Sustainability Impact and Sustainability Mixed Goals.
In a recent podcast interview with interactive investor, the Investment Association (IA), the trade body for the fund industry, said it expects Sustainability Focus to be the largest category.
There are also new naming and marketing rules. As part of this, funds that do not have a sustainable label will not be able to use sustainability-related terms in their name, such as “sustainable”, “sustainability” or “impact”.
At the same time, new measures have been introduced to protect investors from greenwashing. There are also additional disclosure requirements.
What does all this mean for investors?
As a result of these changes, investment products in the UK that have sustainability characteristics in the investment process will fall under the scope of the new regulation.
It is still early days in the adoption of the labels. However, the first funds to get approval now display their corresponding label alongside key investor information
The SDR and investment labels, which are the second wave of regulation implemented by the FCA, came into effect on 31 July 2024. The anti-greenwashing rules came into effect on 31 May 2024 and the naming and marketing rules were expected to follow on 2 December 2024, however, the deadline has been extended until spring 2025 for firms who applied before 1 October 2024.
Why is the new labelling regime needed?
The FCA predicts that sustainability-orientated assets are expected to reach $34 trillion (£26.5 trillion) by 2026. As the industry continues to grow, it is crucial that current challenges are addressed by the regulator to protect retail investors and promote trust and transparency.
The objective of the introduction of four sustainability labels - improver, focus, impact and mixed goals - is to support retail investors in navigating the sustainable investment universe with trust and confidence. The labels provide standardisation across the different types of sustainable strategies and help investors make more informed decisions by distinguishing between the types of strategy that may align with their investment goals and values.
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Although there will still be variation between funds under each label, investors can be assured that each fund will have met strict sustainability-related objectives and disclosure criteria. Improving consumer trust in the financial services industry is important, and the investment labels are a “stamp of approval” by the FCA on sustainable investment products.
To qualify for a sustainability investment label, a product must meet several standards. The fund should aim to achieve clear, positive environmental or social outcomes that meet strong, evidence-based standards, as well as have a clear sustainability goal alongside the financial one.
At least 70% of the fund’s value must be invested in assets that align with this sustainability goal. The product also needs to demonstrate a commitment to a stewardship and engagement strategy.
Finally, it must provide consumer-friendly disclosures before purchase, outlining its sustainability goals and key indicators.
Exceptions
While the FCA’s new labelling requirements apply to most sustainable investment products available to UK retail investors, certain funds are out of scope. This includes:
- Non-UK-domiciled funds, which are not under the FCA’s jurisdiction
- UK-domiciled funds with sustainability characteristics that choose not to apply for a label. These funds will still have specific restrictions, which includes producing consumer-facing disclosures explaining their rationale for not applying. As of 2 December 2024, these funds won’t be able to use terms such as “sustainable”, “sustainability” or “impact” in their marketing
- Funds that fall into the ‘lighter green’ category. This includes ethical funds based on exclusions or ESG-integration funds that use sustainability criteria as part of risk management but not as part of the investment. These funds are not required to have sustainability outcomes but may still integrate ESG considerations to enhance financial returns.
Challenges
The implementation of the new labelling regime has faced several challenges. There have been multiple deadline extensions due to the complex, time-consuming approval process, with many applications requiring multiple rounds of review.
Additionally, some funds have instead opted to forego a label and have dropped the term “sustainable” from fund names, opting instead for terms such as “climate” or “ESG”. This introduces further ambiguity for investors seeking clear sustainable options.
In the coming months, when you’re looking for funds, you’ll see them labelled in a consistent manner, with a cohesive framework to ensure names of funds are accurate and not misleading. However, the challenges and the aforementioned exceptions mean that, at the time of writing, the universe of funds that currently apply for a sustainable fund label is very small.
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There is expected to be an influx of labelling when the naming and marketing rules come into effect on 2 December 2024, and the extended April 2025 deadline.
The FCA’s sustainable investment labelling regime represents a significant step forward in the financial services industry, creating a framework that has long been anticipated. While there have been some expected and unexpected short-term challenges, the regulation seeks to establish standards that protect retail investors, encourage transparency, and counter greenwashing.
In the long term, a wide adoption and understanding of the labelling regime has the potential to build consumer trust and transparency, although its effectiveness in supporting investor decision-making remains to be seen.
What we’re doing at ii
At ii we support our customers to navigate the sustainable universe and continue to monitor developments in the space. The ACE 40 rated list is a shortlist that aims to provide our customers with a selection of high-quality sustainable investment choices across a broad range of markets and investment types.
In addition, we recently launched the new sustainable investment screener to give sustainability-conscious investors a way to navigate and simplify a broad universe using prospectus-based data. Find out more about the screener here.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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