Could Sustainability labelling regime improve investor confidence and support better decisions?

The anti-greenwashing rule basically means that every firm which sells products to retail consumers and wants to talk about sustainability needs to abide by these rules. In addition, the sustainability labels and naming and marketing rules apply to UK asset managers and UK domiciled funds – and the FCA is now consulting on expanding these to portfolio managers as well. Which makes a lot of sense to me, although the timing could be considered as the wealth management sector in particular is under regulatory siege. (We could debate whether this is self-imposed or not in another blog).

The words ‘sustainable’, ‘sustainability’ and ‘impact’ cannot be used to describe products that do not have a label. A bit like the inverse of that Radio 4 gameshow “Just A Minute” where contestants can say everything except the subject! Pretty simple in principle – but this does mean that all comms will need be checked, and firms will need to make sure that where applicable, new descriptions abide by the rules and are clear for consumers.

About 1 in 5 UK investors report holding a sustainable fund today, but the number has fallen since 2022. We can see general low confidence about how to pick one is an important factor – more confident investors and those with higher risk profiles are more likely to have sustainable holding.

So how will the labels land? Will they improve confidence? And will firms decide they can and want to add these labels? As we might expect, the devil is in the detail.

Ethical funds, for example, are creating a few headaches – they are square pegs in a world of round labels. Our data tracks consumer interest in these products but many firms are not yet sure on how they should market these. Of course, ethical funds might also have a sustainability objective and be in scope for a label – or they might not.

The big question is whether the proposed labelling regime will improve investor confidence, support better decisions, drive appetite and uptake, and of course lead to better consumer outcomes?

Let’s have a look at the four labels with big ambitions. Focus, Improvers, Impact, and Mixed Goals. Our team has done a lot of testing to understand how these land with consumers, including quantitative queries to gauge changing appetites. For the last few years we have tracked our seven sustainable cohorts – such as Eco Warriors, Pragmatic Greens, No Nasties and Pure Returns – and can determine shifting consumer demands and trends in response to a number of changes such as greenwashing fears, a growing acceptance of engagement rather than avoidance, and also lower recent returns from the sector as a whole.

Slightly disconcertingly, when we tested the 4 labels, Don’t Know (a fifth option) got a large chunk of the votes, confirming the limits of a label alone.

Sustainability Mixed Goals is by far the most popular label among investors - both among those who already invest sustainably and those who don’t. This label was added as a fourth label by the FCA following consultation and is especially popular among more of the sustainable investors we see as middle of the road – those who want to invest in something ‘good’ but are not too strict about what this may mean. And unsurprisingly, our data shows that the majority of retail investors sit in this middle ground camp.

Some of the labels are going to need more heavy lifting to communicate and explain, as the benefits and objectives are less immediately clear, to a hesitant consumer, with limited trust in an industry which has been a little too quick with the green paintbrush and stock photos of verdant rainforests.

Our 2024 Sustainable Investing - Demand and Disclosure report has input from a nat rep survey of 6000 UK adults and is supported by our team's qualitative insights from anti-greenwashing, sustainability and Consumer Duty comms testing projects.

Join our free-to-attend webinar and insights session on 15 May and to hear more about our findings and disclosures from the report.