There is a “fundamental juxtaposition” between the FCA’s sustainability labels and their interpretation by private investors, a new report from Research in Finance has revealed.
Amid growing concern around greenwashing, in November 2023 the regulator set out rules aimed to support consumers navigating sustainable investments, including new labelling, naming and marketing rules, as well as product and entity level disclosures and obligations for distributors to meet.
According to the FCA, demand for sustainable investments is high, with 81% of consumers wanting their money to “do good”. However, Research in Finance’s Retail Consumer Interest Study found that 67% of private investors felt the lack of metrics to evaluate sustainable investments were the biggest blockers to understanding them.
Despite this, the study found that many private investors felt the labels were not necessary, stating that they would still consider sustainable investments that had not adopted one.
Research in Finance asked 30 private investors to think about what funds might use each of the four sustainability disclosure requirements labels and describe them but their interpretation highlighted a “lack of clarity and the potential for confusion,” the group said.
The majority of investors listed ‘Sustainability Impact’ as their preferred label as they felt it sounded most committed. The label was also considered the clearest to investors. By contrast, the label ‘Sustainability Mixed Goals’ received the least positive reaction, with some investors feeling that a fund using this may not hold sustainability at their core.
Research in Finance said the next few months will be integral to the smooth implementation of SDR, and investors have called for clearer metrics and rankings within the four labels as well as certification/ badges for funds that meet the criteria.
Investors also believe a detailed explanation of each label’s focus and more thorough disclosures on which companies meet the inclusion threshold would make the labelling regime more successful.
In addition, investors are also keen to see more ‘bitesize’ videos and visual information on investing sustainably so they can begin to place the FCA labels in context.
Rachel Powell, research manager at Research in Finance, said: “With concerns for greenwashing, the SDR is a welcome introduction. We would hope that it assists consumers to make decisions based on robust, credible information. However, whether that proves to be the case is yet to be seen. Currently, there’s a fundamental juxtaposition between the FCA’s labels and their interpretation by private investors, leading some to question their necessity.
“We believe the FCA has the best of intentions, and their aim is always to improve and support the industry. But it could be argued that frameworks, like SDR, simply add a layer of complexity to an already regimented sector.”
Main image; milada-vigerova-eqJkqau0C8s-unsplash
