How new labels can help you choose a sustainable fund

It has been a confusing picture for those wanting their investments to do good as well as make money. Different fund names, a variety of terms, and a lack of agreed standards created a maze.

Investors often find it difficult to understand terms like ‘ESG’ (environmental, social and governance), ‘green’ and ‘sustainable,’ and know for sure that assertions around them are legitimate.

While there are still complexities in this area, the launch of a new set of labels for funds should bring much-needed clarity. These are known in the industry as SDR (Sustainability-Disclosure Requirements) labels and are designed to show investors which investments meet a high standard of sustainability.

Overseen by the UK financial regulator, the Financial Conduct Authority, the four labels provide a ‘kitemark’ for this type of investing. Labelled funds must meet a high standard and provide evidence to back up claims of positive environmental or social impact.

Investors prioritising sustainable investing should therefore be able to make easier comparisons between products and have greater confidence a fund meets their needs.

The four labels are:

1. Sustainability Focus: Funds investing towards positive environmental and social outcomes, investing in assets that already meet a robust, evidence-based standard of sustainability.
2. Sustainability Improvers: Funds investing in assets not considered sustainable now but have a sound strategy to make meaningful improvements. For example, shares in an oil company with plans to invest significantly in renewables.
3. Sustainability Impact: Funds investing in assets making a specific and measurable positive environmental or social impact. The role of fund manager is assessed on an ongoing basis to demonstrate this as well as the assets themselves.
4. Sustainability Mixed Goals: Funds investing in a combination of the above approaches. At least 70% of assets must be in line with the respective objectives for each part, and no holdings must conflict with any.

What are sustainable funds?

Eligible UK-domiciled products can choose to use the new sustainable investment labels from 31 July 2024. The managers also need to produce new sustainability-related documents for investors. However, the labels do not currently apply to non-UK domiciled funds, so most ETFs for instance are not covered by the rules.

To qualify as a sustainable fund, at least 70% of the assets of a fund must be invested according to its sustainability objective. The remaining assets must not conflict with the objective, but they don't have to meet it exactly.

Information relating to the fund’s sustainability will appear in new documents available alongside other product literature such as the fund factsheet, KIID and prospectus. The main source for retail investors is a brief consumer document covering the key sustainability-related features of the fund. This explains what the fund’s label means, outlines the sustainability objectives and investment approach, and describes how sustainability performance is measured.

More detailed disclosures are available in other documents, including in the fund prospectus if applicable. Ongoing disclosures on how the fund is performing according to its sustainability objectives will also be reported regularly but will generally not be available immediately when the rules come into force.

Watch Paris Jordan, Charles Stanley’s Head of Responsible Investing, explain what the new sustainable fund labels mean for investors.

What about other funds and ‘responsible’ products?

Most funds will not have a sustainable label. The requirements are quite precise and not all broader ‘responsible’ or ‘ethical’ funds meet them, especially if they are passive funds that aim to follow a given index rather than taking an active approach. Screening out or prioritising certain investments isn’t on its own enough to meet the requirements for a label, and a fund must have specific sustainability objectives with measurable positive outcomes.

This is why the ‘responsible’ section of the Charles Stanley Preferred Fundlist contains funds that do not have a label. They either take a broader approach that doesn’t meet the criteria, or in the case of overseas domiciled funds they are not covered by the rules. Finally, some funds may acquire a label at some point in the future if they haven’t yet completed the process of setting out their policies or putting together the required documents.

As such wider responsible funds may not be suitable for investors looking primarily for investments specially designed to promote positive environmental and social outcomes. However, any such UK-domiciled product will still have documents setting out their sustainability-related investment policies and objectives from 2^nd April 2025. For the time being investors should check fund literature carefully to ensure a fund meets their requirements.

Find out more about responsible investing