Updates to the Sustainable Disclosure Requirements

21 November 2024 — The Financial Conduct Authority (FCA) recently introduced updates to its Sustainable Disclosure Requirements (SDR) and the new investment labels framework, which aim to bring more clarity and transparency to sustainable investments.

The FCA is introducing four labels to help investors better understand the sustainability characteristics of investment products. These are:

• Sustainable Focus: This label is for funds that primarily invest in assets that are already environmentally and/or socially sustainable. These funds will need to show that at least 70% of their assets are aligned with sustainable objectives.
• Sustainable Improvers: This category targets funds that aim to improve the sustainability performance of the assets they invest in over time. The focus here is on driving positive change in companies or sectors that are on a path towards better sustainability outcomes.
• Sustainable Impact: This is for funds that invest in solutions that actively address specific environmental or social challenges, usually aligned with global goals like the UN’s Sustainable Development Goals (SDGs). These funds need to demonstrate a measurable, positive impact.
• Sustainable Mixed Goals: This label is designed for funds that pursue a combination of sustainability objectives. Unlike the other three labels, which are more singular in focus (either on sustainable assets, improvements, or impact), this category allows for a more diversified approach.

The FCA is also reinforcing its stance against greenwashing by introducing stricter rules to ensure that all sustainability claims are accurate, clear, and not misleading. This means funds must provide evidence for their sustainability claims and justify the use of sustainable labels.

Funds that do not qualify for any of the new labels will be restricted in their use of certain sustainability-related terms (like “ESG,” “green,” “sustainable,” etc.) in their product names and marketing materials. Their intention is to prevent funds from misleading investors about the extent of their sustainability focus.

Well-known firms like Stewart Investors have been impacted by this change and are removing the word ‘Sustainability’ from their fund names. Clients will likely recognise the Stewart Investors Asia Pacific Leaders Sustainability fund among their product range, which has held a long-serving seat on the Chelsea Core Selection. From 2 December 2024 this fund will be renamed to Stewart Investors Asia Pacific Leaders.

All fund name changes and marketing requirements outlined must be met by 2 December 2024, however further disclosure will be phased in over the next two years. It’s worth noting that the vast majority of funds that have to change their name because they don't fit the exact remit of the new labels, will see no changes to their investment philosophy or process.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.