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Sign up now4 new labels launched to make ethical investing easier
Clampdown on greenwashing aims to make investing according to ESG principles clearer
A new system for making ethical investing easier for consumers, introduced by the Financial Conduct Authority (FCA), has come into effect today, 31 July 2024.
The new labels, applied to investment funds, aim to make clear the differences between types of sustainable investment.
They will tell investors at a glance whether funds are investing for impact, meeting sustainable targets, or moving companies towards sustainability.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
How do you find funds investing in positive change?
Many people trying to invest their money ethically expect environmental, social, and governance aka 'ESG’ or ‘sustainable’ funds to mean the funds are investing to create a positive impact on the planet or its people.
But, the vast majority of ESG funds don’t work in this way, and currently, the only way to work out what a fund is actually doing is by reading the details in the 'Key Investor Information Document'.
To make it easier, the new labels will clearly signpost the difference in approach.
Only funds with the ‘sustainability impact’ label invest in assets directly making a positive impact.
More funds will fall under two of the other labels: ‘sustainability focus’ and ‘sustainability improvers’.
The sustainability focus label is for funds investing only in assets that meet ‘a robust, evidence-based standard of sustainability.' This means the companies they invest in are not necessarily doing any impact work on climate, but equally are substantially less damaging to the planet than a fund with no adaptations.
Sustainability improvers will include companies that are not sustainable, but that have concrete aims and can demonstrate they are making progress to achieve them.
There is also a label designated for funds that invest across a range of strategies - ‘sustainability mixed goals’ - funds with this label invest in a mix of the above styles.
- Find out more: ethical investing explained
How will the labels work?
If a firm wants to apply one of the labels to its fund, it will notify the FCA of its use, rather than making an application and waiting for it to be accepted.
A ‘fund authorisation team’ at the FCA will regularly check funds are meeting requirements. If the team finds a fund does not line up with requirements, the label will be removed or revised, and investors will be updated.
The FCA has said they will not provide a publicly available list of the funds under each label.
When it first announced the measure the FCA estimated that 43% of 630 funds currently using some form of sustainability language will be eligible for a label.
If funds aren’t eligible for a label, they won’t be able to use the term 'sustainable' at all. Other words such as 'responsible' or 'ESG' will be allowed – though these funds will still have to comply with the anti-greenwashing rule.
This aims to allow funds to explain if they exclude companies invested directly in fossil fuels, tobacco, or weapons but don't do any other work to meet sustainability standards, for example.
It is worth noting that there is no guarantee that fund managers will use the labels.
- Find out more: investment funds explained
The anti-greenwashing rule
The labels follow the ‘anti-greenwashing rule’ which came in May 2024. Financial firms are only able to market their products as ‘green’ or ‘sustainable’ if they can provide the evidence to support those claims.
This measure aims to put an end to misleading claims and suggestions about financial products' impact.
The rule applies to all products and services provided by FCA-regulated companies - so covers financial products beyond investments, including current and savings account providers and insurers.
Why do we need the labels?
Sustainable investing is far from a fringe interest - the FCA’s research found that 81% of people would like their money to do some good while providing a return.
But over the years our research consistently showed a disconnect between what investors expected from their sustainable investments and what they were actually getting.
For example, we previously found that some investment funds with the ESG label invested in fossil fuel giants, as well as companies linked to the destruction of the Amazon rainforest.
But, when we asked 289 Which? Members who invested in ESG funds in January 2022, two-thirds were fairly or very confident that they weren't invested in these types of companies.
In many cases funds had 'ESG' in the name if the fund manager only considered the impact of climate change on the returns of the fund, but not the other way around.
- Find out more: best investment platforms
