The Financial Conduct Authority (FCA) has unveiled four new investment labels that could guide investors who are interested in sustainable opportunities. Amid worries about greenwashing, it could provide some much-needed clarity.

Research suggests that a significant proportion of investors want to take environmental, social, or governance (ESG) factors into consideration when they’re making investment decisions. According to the FCA, around $18.4 trillion (£14.46 trillion) of ESG-orientated assets are being managed globally.

In fact, an FCA survey found that 81% of consumers want their money to “do good” as well as deliver a return:

• 76% said they’d like to invest in a way that protects the environment
• 74% said they would like to invest in a way that has a positive social impact.

Yet, there are trust issues – 7 in 10 investors say they think that many investments that claim to be sustainable aren’t.

It’s no surprise that some investors aren’t sure how reliable sustainable investment claims are. Up until now, terms like “green”, “sustainable”, or “responsible” haven’t had clearly defined labels. So, understanding the positive impact your investment decisions might have on key ESG issues can be difficult to measure. As a result, the FCA has set out four investment labels.

More than 600 funds could use the new sustainability investment labels

The FCA estimates that at least 630 funds use sustainability-related terms. The four new labels could make it easier for investors to compare investment opportunities and boost confidence that sustainability claims are reliable.

The labels include:

1. Sustainability Focus: At least 70% of the fund’s investments must be environmentally or socially sustainable.

2. Sustainability Improvers: This label signifies that a fund may invest in assets that aren’t sustainable now, but have an aim to improve their sustainability over time.

3. Sustainability Impact: Funds with this label will invest in solutions to problems affecting people or the planet to “achieve pre-defined positive measurable impact”.

4. Sustainability Mixed Goals: This applies to a mix of sustainability objectives and approaches.

A minimum 70% threshold applies to each of the four labels. This means not all investments within the fund need to meet the criteria. Sheldon Mills, executive director of consumers and competition at the FCA, explained that some flexibility was needed to ensure firms could provide funds that meet the label requirements.

Funds should disclose what the other 30% is invested in, so investors can understand if it’s the right option for them.

The introduction of the new labels means the FCA will be able to review and challenge authorised funds if they use misleading language. It’s a step that aims to provide investors with greater confidence when they want to weigh up ESG funds.

The FCA will now consult on anti-greenwashing guidance

It’s hoped the new labels will help tackle greenwashing, where a company, organisation, or fund gives a false impression about how they are environmentally sound or solving the climate crisis. The FCA is set to open a consultation on anti-greenwashing guidance with rules expected to come into force on 21 May 2024.

The incoming rules would mean FCA-authorised funds would need to be “fair, clear, and not misleading” when referencing sustainability. This will cover all communications, such as statements, strategies, and even images.

Sacha Sadan, director of ESG at the FCA, said: “By improving trust in the sustainable investment market, the UK will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international centre of investment.”

Investing with ESG factors in mind could align your portfolio with your values

The FCA research indicates that a high proportion of investors would like to see their values reflected in the way they invest their money. A tailored investment strategy might provide you with a way to incorporate your views while still generating returns.

It remains important that you also consider traditional factors when making ESG investment decisions. So, you may review your investment goals, risk profile, and potential returns alongside ESG issues.

If you’d like to discuss how to reflect your values in your investments, we can help. We’ll work with you to create an investment strategy that suits your goals, circumstances, and ESG views. Please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.