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Delays to enforcement of sustainability naming rules
In early September, the Financial Conduct Authority (FCA) announced they were offering firms temporary flexibility to comply with ‘naming and marketing’ rules under their new Sustainability Disclosure Requirements (SDR) regime until 2 April 2025.
The SDR and investment labels regime was published on 28 November 2023 and since 31 July 2024, managers of UK-based investment funds have been able to use investment labels on their products. The ‘naming and marketing’ and disclosure rules are due to come into force from 2 December 2024.
However, through engagement with industry and their representative trade bodies, it has become clear to the FCA that it has taken longer than expected for some firms to make the required changes.
Given the importance of getting SDR right for investors, they are offering limited temporary flexibility, until 5pm on 2 April 2025 for firms to comply with the ‘naming and marketing’ rules. For more information about the SDR, read our article, ‘Your guide to the new Sustainability Disclosure Regime,’ here.
What are the new naming rules?
The guiding principles state that a fund that uses sustainability-related terms in its name could be misleading unless the fund pursues ESG/sustainability characteristics, themes or outcomes in a way that is substantive and material to the fund’s objectives, investment policy and strategy.
The new naming rules, for funds that are marketed/sold based on sustainability-related terms but do not have a label, require funds to:
- have sustainability characteristics
- ensure that funds’ names accurately reflect those characteristics
Sustainability characteristics should be material to that product, for example at least 70% of its assets should have sustainability characteristics.
What does this mean for ESG investing?
With global assets under management in environmental, social and governance (ESG)-oriented assets expected to increase to $34trn by 2026, the measures set out by the FCA aim to:
- protect investors by helping them to make more informed decisions when investing
- help maintain the UK’s position as a world-leading, competitive centre for asset management and sustainable investment.
However, it’s important to note that the sustainable labels are focussed on the environmental aspect of ESG investing, and funds that are investing in companies which are striving to improve their impact on society or improve governance standards, such as gender and diversity equality, would not be able to apply for one of the sustainable labels.
Some funds carrying an ESG label may also have an element of sustainable or environment focus, but not to a sufficient degree to qualify under the sustainable label regime.
Importantly, if a fund does not have one of the sustainable labels but claims to invest in a sustainable manner, they will still have to be able to evidence this to the Regulator and provide appropriate disclosures to investors.
Although the labels do provide reassurance for people looking to invest in funds with a positive environmental impact, it can be complicated to work out how to invest money to match their goals and beliefs.
As part of our ongoing investment services, we offer clients a selection of risk adjusted portfolios, across a broad range of investment styles, including an ESG range. For those with unique investment preferences or requirements which dictate the need to construct an individual portfolio, we can provide bespoke portfolios, subject to suitability.
For more information about our ongoing services, please visit our services page or get in touch with your usual TPO Adviser.
Please note: The sustainable label regime only applies to individual UK funds at the time of writing (September 2024) and consultation is underway on how the new sustainable labels may be applied to portfolios of funds.
Investment returns are not guaranteed, and you may get back less than you originally invested. Past performance is not a guide to future returns.
The information in this article is correct as at 24/09/2024