New measures to cut through greenwashing jargon

Net zero, climate change, COP 26, ESG (Ethical, Sustainable, Governmental), Just Stop Oil, carbon offset, sustainability… what do they all mean? And are they standardised terms?

Sustainable, ESG or ethical investing has become steadily popular in recent years as investors turn their attention to putting their money with companies or funds that focus on ‘doing good’ – or their social and environmental impacts. Companies in all sectors, including financial services companies, are increasingly making public commitments and statements about their sustainability related objectives.

Customers investing in sustainable investment products must be able to trust the sustainability claims made by companies. Against that background, the Financial Conduct Authority (FCA), which regulates financial services companies in the UK, has introduced a series of new measures which will change the way funds, and other products and services making sustainability related claims, can be marketed to investors. The FCA are not acting alone. These measures are part of a new regime being introduced by financial regulators across the globe.

The changes are designed to improve the clarity and consistency of information about sustainable investment products. The aim is to ensure that financial products and services that are marketed as sustainable live up to these claims and are backed by robust evidence.

In the UK, the rules are being introduced on a staggered basis starting with fund managers, and companies who distribute funds to retail investors in the UK. Rules applying to portfolio managers (discretionary investment managers) and advisers are to follow. The new regime is called ‘SDR’ – Sustainability Disclosure Requirements.

We are drawing your attention to the new regime as you will start to see changes to the way in which fund managers market funds which make sustainability related claims, in the UK.

 

Terminology – definition of ‘sustainability’

The new FCA rules refer to ‘sustainability’ which is now a defined term with a specific meaning. In simple terms, it refers to a product having ‘environmental or social characteristics’. In recent years, the terminology surrounding ‘sustainability’ has become quite complex with terms such as ‘sustainable’, ‘green’ ‘ethical’ and ‘responsible’ being used interchangeably. This has made it increasingly difficult for investors to understand precisely what these terms mean and to make comparisons between different investment solutions.

The new SDR regime changes this. It aims to cut through the jargon and make it clearer what is meant by ‘sustainability’. There are new rules surrounding the use of certain words or terms and how they can be used.

New labels for funds (from 31 July 2024)

To help investors understand and navigate the range of sustainable investment options, the FCA is introducing four new investment labels for funds. These are designed to help investors identify funds with different sustainability goals.

Label

FCA description

Sustainability Focus

These funds invest mainly in assets that focus on sustainability for people or the planet. Examples may include activities to support the production of energy, for example, from solar, wind or hydrogen.

Sustainability Improvers

These funds invest mainly in assets that may not be sustainable now but aim to improve their sustainability. Examples may include investments in companies that are on a credible path to net zero by 2050 or are committed to improving social standards such as human rights.

Sustainability Impact

These funds invest mainly in solutions to sustainability problems with an aim to achieve a positive impact for people or the planet. Examples may include renewable energy generation and social housing.

Sustainability Mixed Goals

These funds invest mainly in a mix of assets that either focus on sustainability, aim to improve their sustainability over time, or aim to achieve a positive impact for people or the planet.

Source: FCA Consumer News – Sustainable investment labels and anti-greenwashing, 22/5/24

 

Fund managers can choose to use the new sustainable investment labels if their funds meet the criteria to do so. As well as using the label, the fund manager will need to provide clear and simple information (consumer facing disclosures) about the fund’s sustainability goal and its approach to achieving it.

How might this affect you?

As these changes start to be introduced, existing funds may decide to start using sustainability labels or make changes to the structure of their funds. New funds – using one of the sustainability labels – may also appear on the market. It is, however, likely to take some time for labelled funds to appear and other changes to be made. Fund labels and other changes being introduced are part of a long-term regulatory strategy.

Where we provide you with advice, we will discuss with you any preference you may have for sustainable investing and will take your preferences into account when making our recommendations. We will continue to monitor sustainable investment solutions available to you as they come onto the market. The new labels and disclosure information will help us to identify potentially suitable investment solutions to reflect different client preferences.

Where can I find out more information about the changes?

The FCA has produced a consumer information page which provides an overview of the changes and what they mean for investors.

If you have any questions about the information above and what it may mean for you, please contact your financial adviser.

The value of your investments can go down as well as up, so you could get back less than you invested.