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Net zero, climate change, COP 26, ESG (Ethical, Sustainable, Governmental), Just Stop Oil, carbon offset, sustainability… what do they all mean? And are they standardised terms?
Sustainable, ESG or ethical investing has become steadily popular in recent years as investors turn their attention to putting their money with companies or funds that focus on ‘doing good’ – or their social and environmental impacts. Companies in all sectors, including financial services companies, are increasingly making public commitments and statements about their sustainability related objectives.
Customers investing in sustainable investment products must be able to trust the sustainability claims made by companies. Against that background, the Financial Conduct Authority (FCA), which regulates financial services companies in the UK, has introduced a series of new measures which will change the way funds, and other products and services making sustainability related claims, can be marketed to investors. The FCA are not acting alone. These measures are part of a new regime being introduced by financial regulators across the globe.
The changes are designed to improve the clarity and consistency of information about sustainable investment products. The aim is to ensure that financial products and services that are marketed as sustainable live up to these claims and are backed by robust evidence.
In the UK, the rules are being introduced on a staggered basis starting with fund managers, and companies who distribute funds to retail investors in the UK. Rules applying to portfolio managers (discretionary investment managers) and advisers are to follow. The new regime is called ‘SDR’ – Sustainability Disclosure Requirements.
We are drawing your attention to the new regime as you will start to see changes to the way in which fund managers market funds which make sustainability related claims, in the UK.
Terminology – definition of ‘sustainability’
The new FCA rules refer to ‘sustainability’ which is now a defined term with a specific meaning. In simple terms, it refers to a product having ‘environmental or social characteristics’. In recent years, the terminology surrounding ‘sustainability’ has become quite complex with terms such as ‘sustainable’, ‘green’ ‘ethical’ and ‘responsible’ being used interchangeably. This has made it increasingly difficult for investors to understand precisely what these terms mean and to make comparisons between different investment solutions.
The new SDR regime changes this. It aims to cut through the jargon and make it clearer what is meant by ‘sustainability’. There are new rules surrounding the use of certain words or terms and how they can be used.
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Anti-greenwashing
The FCA has introduced an ‘anti-greenwashing’ rule. This rule prevents financial services companies from making false claims about their products or services being socially responsible or environmentally sound when they are not. It requires firms to make sure that any sustainability references are correct, complete, and capable of being substantiated.
New labels for funds (from 31 July 2024)
To help investors understand and navigate the range of sustainable investment options, the FCA is introducing four new investment labels for funds. These are designed to help investors identify funds with different sustainability goals.
