As we’re approaching the end of another hot summer, you might be wondering if your money is contributing to the climate crisis.
In recent years a large number of people have chosen investment funds that avoid fossil fuels, or aim to find solutions such as renewable energy.
To help you pick such funds, and avoid greenwashing, in July 2024 the Financial Conduct Authority (FCA) launched ‘sustainability disclosure labels’, which funds could adopt if they met certain criteria.
Over a year on, there are 145 funds using or planning to use such labels. We look into what they invest in and who offers them.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
What are sustainability disclosure labels?
Due to concerns over greenwashing – the practice of exaggerating or falsely advertising a company’s environmental friendliness – the FCA last year introduced a labelling regime for funds that have a specific environmental or social goal.
The labels are designed to give investors clear and simple information on what that goal is and the approach to achieving it.
There are currently four available labels:
- Sustainability Impact: Funds that invest mainly in solutions to sustainability problems with an aim to achieve a positive impact.
- Sustainability Mixed Goals: Funds that 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.
- Sustainability Focus: Funds that invest mainly in assets that focus on sustainability, such as supporting the production of renewable energy.
- Sustainability Improvers: Funds that invest mainly in assets that may not be sustainable now, but aim to improve their sustainability in the future.
The FCA’s criteria for adopting a label includes a requirement that usually at least 70% of the product’s assets must be invested in accordance with the chosen sustainability objective.
Funds may only use one label, however there is no requirement for providers to seek prior approval from the FCA before applying a label. Instead, the watchdog will review, and may challenge applications that don’t meet the relevant criteria.
- Find out more: Ethical investing explained
Which funds are using labels?
According to Morningstar, a financal services company, there are around 521 funds in the UK with ‘sustainability characteristics’, which suggests just over a quarter (27.8%) have adopted a label.
The true number could be higher: the FCA doesn’t currently have a published list of funds using a label, but Morningstar Direct has been tracking the ones that have made public declarations of their use.
So far 93 of the 145 funds have made a public disclosure according to Morningstar, a list of which can be found in the below table.
Source: Morningstar Direct
All labelled funds in this list are actively managed, where a fund manager picks what to invest in.
Despite the popularity of passive funds – which track an index or group of companies – none appear in Morningstar’s list. We’ve previously warned that passive funds may not be the best choice for ethically-minded investors.
The most popular label adopted by funds is the Sustainable Focus label, 64 of the 93 disclosed funds.
The other labels have proven much less popular, with only 15 adopting Sustainable Impact, 10 Sustainable Improvers and four Sustainable Mixed Goals.
Louisa Chender, sustainable financial policy technical specialist at the FCA, has stated that several funds have changed their names and descriptions to comply with the naming and marketing rules, regardless of whether a label has been adopted or not.
What do funds with sustainable labels invest in?
Most of the funds are focused on equities (company shares), but there are also a number of fixed income (bond) funds, as well as some mixed allocation ones and a single property fund.
The largest fund by asset value to have adopted a label is Royal London Sustainable Diversified Trust, which manages £3.5bn in assets and has the Focus label, according to Morningstar.
The trust is a mixed allocation fund, with a stated aim of investing in companies that make a positive contribution to one or more ‘sustainability themes’ (clean, healthy, safe, inclusive), through their products or services. Top holdings include Standard Chartered, Microsoft and Broadcom.
The largest equity fund is Royal London Sustainable Leaders Trust, which manages £2.8bn in assets and has the Focus label.
Similar to the Royal London Diversified Trust, it focuses on companies with a positive contribution to sustainability themes. Top holdings include Standard Chartered, RELX and Prudential.
The largest fixed income fund is Liontrust Sustainable Future Monthly Income Bond Fund, which manages £508.5m in assets and has the Focus label.
It has a stated aim of producing monthly income payments together with capital growth through investment in sustainable securities. Top holdings include UK government bonds, NatWest and BNP Paribas.
The oldest fund to have adopted a label is the M&G Global Sustain Paris Aligned Fund, dating all the way back to 1967, whose currently stated aim is to invest at least 70% of the fund into companies that contribute towards the Paris Agreement climate change goal.
Schroders has adopted the most labels according to Morningstar, applying them to 13 of their funds. They are followed by Liontrust (10), Columbia Threadneedle (9) and Royal London (8).
- Find out more: How to invest in funds
Awareness remains low
In total, these 93 funds with sustainable labels manage well over £41bn in assets, yet awareness of the labels remains low.
Just half (52%) of investors are currently aware of them according to a survey conducted by The Investment Association and The Wisdom Council.
However, nearly all (94%) said they would find them helpful. Plus, 86% of financial advisers said they were aware of the labels, and 77% are confident they understand enough about the labels to choose funds appropriate for their clients’ sustainable preferences.
According to the FCA’s policy statement: ‘Our aim with the Sustainability Disclosure Requirements (SDR) and investment labels regime is simple – financial products that are marketed as sustainable should do as they claim and have the evidence to back it up.
‘The regime will support consumers in navigating their investments with trust that the products they are buying do as they say they will.’