Nearly three quarters (67%) of private investors said the lack of metrics to evaluate sustainable investments were the main blocker to understanding Sustainability Disclosure Requirements (SDR) labels, Research in Finance found.
The Retail Consumer Interest (RCI) study carried out by the firm explored 509 UK private investors’ understanding of, and reaction to, the fund labels as defined by SDR. It found although the majority of private investors fail to understand SDR metrics, for some, the labels provide a ‘seal of approval’ by offering a degree of standardisation and credibility to the funds that adopt them.
One investor said: “To be able to have an accreditation that you’re making an investment in an area that is sustainable and fits within the ESG and sustainable regulations and the FCA has approved it proves you know that you’re buying into something that is truthful and trustworthy.”
However, this comes as many surveyed investors also said that labels are unnecessary, opting for sustainable investments that are ‘unlabelled’. One investor said that “labels add very little or no value at all.”
Further, the study asked a panel of 30 private investors to apply the four SDR labels provided to a selection of funds. Yet, the differences in interpretation highlighted confusion and a lack of clarity. The majority listed ‘Sustainability Impact’ as their preferred label because it sounded ‘the most committed’, and applied it to products that seek to achieve measurable environmental and/or social impact.
This label also remained the clearest to investors, who associated it with phrases such as like ‘clear goals’, ‘proactive’, ‘measurable’, and ‘primary non-financial aims’. This comes as the label – ‘Sustainability Mixed Goals’ – was the least well-received, with investors saying that this fund “may not hold sustainability at it’s core or muddy their commitment to sustainable aims”.
Industry interpretation of SDR labels
Research in Finance has identified six core areas that are needed to strengthen investors’ understanding of SDR labels. This includes: (i) Clearer metrics and rankings within the four labels, (ii) Certification/badges for funds that meet the criteria, (iii) A detailed explanation of each label’s focus, (iv) The FCA to highly publicise SDR in investment news, (v) More thorough disclosures on what companies meet the inclusion threshold, and lastly, (vi) Third-party videos on investing sustainably.
Rachel Powell (pictured), research manager at Research in Finance, said: “With concerns for greenwashing, the SDR is a welcome introduction. We would hope 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.
“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.”
