FCA announces three sustainable fund labels in greenwashing crackdown

SDR consultation proposes fund labelling, disclosure and marketing rules


Natasha Turner

The Financial Conduct Authority (FCA) is proposing three investment labels as part of its long-awaited Sustainability Disclosure Requirements (SDR).

In its consultation paper published today, the FCA has announced new sustainable fund labels as part of its broader anti-greenwashing rule. These are “sustainable focus” funds that invest in sustainable assets, “sustainable improver” funds that invest in assets looking to improve their sustainability over time, and “sustainable impact” funds that invest in solutions.

Sustainable focus

Sustainable focus are products with an objective to maintain a high standard of sustainability in the profile of assets by investing to meet a credible standard of environmental and/or social sustainability; or that align with a specified environmental and/or social sustainability theme. At least 70% of a sustainable focus product’s assets meet a credible standard of environmental and/or social sustainability, or align with a specified environmental and/or social sustainability theme.

Sustainable improvers

Sustainable improvers are invested in assets that, while not currently environmentally or socially sustainable, are selected for their potential to become more environmentally and/or socially sustainable over time, including in response to the stewardship influence of the firm.

Sustainable impact

Sustainable impact are products with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes. These are invested in assets that provide solutions to environmental or social problems, often in underserved markets or to address observed market failures.

Notably, ESG-integrated products won’t meet the criteria for sustainable focus funds.

The new labels have been called “ambitious” and welcomed by the UK Sustainable Investment and Finance Association, whose CEO James Alexander sits on the Disclosures and Labels Advisory Group that helped advise the regulator on the SDR.

“Across the sustainable label categories, we are pleased that the approach recognises savers’ diverse preferences for addressing the real-world sustainability challenges we face,” Alexander said.

“Setting out clear criteria for funds that aim to invest in solutions, achieve positive impact and help to make improvements to the companies that are still on a sustainability journey.”

To apply for these labels, firms must meet five overarching principles relating to the funds’ sustainability objective, investment policy and strategy, key performance indicators, resources and governance, and investor stewardship.

The new labelling requirements were also welcomed by the Investment Association, whose director for investment and capital markets Galina Dimitrova said: “A labelling system can play a valuable role in providing a useful shorthand to help savers navigate the growing number of sustainable and responsible investment products and to compare the sustainability credentials of their investments.”

However, Ottilia Csoti, associate at law firm Fladgate, noted that while new labels are “undoubtedly be a good step towards reducing the risk of greenwashing…the proposals allow for the inclusion of coal, gas and oil investments under certain conditions which, given the relatively long lead time for these measures and the scale of the climate crisis, likely means these measures will be of limited effect in urgently directing capital flows away from investments that further the consumption of fossil fuels”.


Today’s consultation paper follows a discussion paper that was published in November 2021, with the regulator originally due to consult on the plans in Q2 of this year. Once the regulator has consulted on the proposals for the regime it will publish a policy paper with the final version of the new rules.

Given the breadth of sustainable investment products and styles, the FCA’s main concerns are some firms are making misleading claims and that the market is difficult for consumers to navigate.

Labelling is part of the FCA’s general anti-greenwashing rule, which also encompasses disclosure, naming and marketing of funds.

For this, all regulated firms must name and market their products in a way that is “clear, fair and not misleading, and consistent with the sustainability profile of their product or service” even if they don’t apply for a sustainability fund label.

As part of this, it will be cracking down on firms using labels such as ESG, climate, green, Paris-aligned and so on in their marketing material to retail investors (institutional investors are exempt). So a fund using an ESG-tilted benchmark could disclose this information but not necessarily call itself an ESG fund.

“Greenwashing misleads consumers and erodes trust in all ESG products,” said FCA director of environmental, social and governance, Sacha Sadan.

“Consumers must be confident when products claim to be sustainable that they actually are.”

The consultation is open until 25 January 2023. It is aiming to finalise its proposals by mid-2023 and have the first part of it – the general alignment of products with their marketing – apply provisionally by 30 June 2023.

The parts of the rule relating to labelling and disclosure will come into effect 12 months after that, so provisionally from 30 June 2024. A year after that, entry-level disclosures in the sustainability entity report will start to be implemented.

Becky O’Connor, head of pensions and savings at interactive investor said: “Investors who want to make their money make a difference need to be able to trust that the investment they are buying actually does what it says on the tin.

“With so many different and often conflicting rating systems and definitions currently floating around, it can be hard to know what investments are truly helping the planet and easy to lose faith in the whole idea of sustainable investment.

“The FCA’s measures should go a long way to restoring faith and eliminating exaggerated and downright misleading marketing of financial products. Moves towards official definitions and labels are a welcome development.” 

The FCA’s consultation also proposes new rules on disclosure requirements – you can find all the details on this on ESG Clarity here.

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