The UK’s rules around the naming and marketing of sustainable funds have resulted in a “de-facto fifth label” given the higher than expected number of asset managers choosing not to use one of the four official labels for their funds, an investor survey has found.
The report by UKSIF and PwC UK on the UK’s Sustainability Disclosure Requirements echoed widespread concerns that adoption of one of the four labels introduced by the regime – Focus, Impact, Improvers or Mixed Goals – was lower than anticipated.
Interviews with asset managers found that many felt the bar for demonstrating intentionality and sustainability outcomes was very high, “and perceived to favour detailed quantitative KPIs, often aligned with ESG rating methodologies or external standards, over qualitative analysis”.
Managers also felt that obtaining a label was easier for funds investing in popular environmental themes such as clean energy, while social impact strategies found it more difficult amid a lack of standardised metrics.
While managers who had labelled their funds said they appreciated the opportunity to reconsider fund processes and disclosures, there were concerns that the resulting disclosure and non-financial objectives could prove confusing for the retail investors for whom the regime was designed.
Under the regime’s naming and marketing rules, funds that did not use one of the official labels were no longer permitted to use the terms “impact” or “sustainable” from the end of last year.
They were permitted, however, to use ESG-related terms or phrases such as “scored and screened” or “best in class”, leading to widespread renaming as investors opted for other ways to describe their funds.
This meant the naming rules effectively created a “de-facto fifth label”, the UKSIF report said. “Many firms viewed this category as a pragmatic way to market ESG‑integrated or sustainability-themed products without the burden of meeting formal label thresholds, while retaining flexibility in portfolio design and alignment with non-UK fund ranges.”
UKSIF added that a smaller group of managers saw complying with the rules as a stepping stone to labelling a fund, allowing them to assess whether the benefits of a formal label outweigh the additional compliance demands as well as refining disclosures.
However, the report warned that the ambiguity of this extra category raises potential reputational challenges.
Without a label, firms reported facing difficulties in clearly communicating the nature and sustainability approach of these products to investors and distributors, it said.
Concerns were also expressed that the category could evolve into a “catch-all”, similar to the way in the Article 8 fund designation under the EU Sustainable Finance Disclosure Regime has been used to cover a wide range of ambition and integration.
The Financial Conduct Authority, which is responsible for approving changes to fund disclosures that are made in order to apply a label, did not respond to a request for comment.