A year on from the FCA publishing their rules on anti-greenwashing, the latest wave of Research in Finance’s Retail Consumer Interest Study (RCI) explores private investor’s understanding of, and reaction to, the Sustainability Disclosure Requirements (SDR).
According to the FCA’s Policy Statement PS23/16 , demand for sustainable investments is high, with 81% of consumers wanting their money to “do good” while bringing returns. However in contrast, the previous wave (10) of Research in Finance’s RCI study revealed that nearly three quarters (70%) of private investors weren’t planning to invest more sustainably in the next year. The lack of trust in green claims being the main barrier, cited by over half (55%).
End investors’ Initial reactions to the FCA’s SDR were positive
Wave 10 of Research in Finance’s RCI found that almost three quarters (67%) of private investors felt the lack of metrics to evaluate sustainable investments were the biggest blockers to understanding them. Thus, SDR could be considered a ‘step in the right direction’ – particularly the new labels, in relation to more trustworthy data and information for making informed investment decisions.
For some, the labels do provide a ‘seal of approval’, offering a degree of standardisation and a feeling of credibility in the fund adopting them. “To be able to have an accreditation that you’re going to be making an investment in an area that is sustainable and fits within the ESG and sustainable regulations and the FCA have approved it, then at least you’ve got a head start and you know that you’re buying into something that is truthful and trustworthy”, commented one private investor.
A year on from the policy statement, and sustainability labels aren’t considered necessary
Wave 11 of RCI, completed in May 2024, found that many private investors felt the labels weren’t necessary. In fact, they’d still consider sustainable investments that hadn’t adopted one.
One investor even described the labels as ‘badge mascots placed on cars’, stating “very little, or no added value at all, is added to the basic product being described. It is all words rather than tangible facts and figures.” In their words, the FCA sustainability report “does not advance the state of the finance industry as a retail investor.”
They went on to explain how retail investors are now effectively ‘cut out’ from receiving background research information due to the FCA tightening up regulations regarding who can give financial advice. “There is an information vacuum now, just because regulators are worried the public will make inadvisable share and fund investments,” they explain. “It would be more sensibly for advisers JUST to advise retail investors to do their own research, and not act as a ‘nanny’ state.”
Labels need to be better understood by end investors before they have a place in the investment selection process
As part of this year’s Wave 11 of RCI, Research in Finance asked a panel of 30 private investors to think about what funds might use each of the four SDR labels and describe them. The differences in interpretation highlight a lack of clarity and the potential for confusion.
The majority listed ‘Sustainability Impact’ as their preferred label as they felt it sounded the most committed. Products seeking to achieve a predefined, positive, measurable environmental and/or social impact resonate, as many who invest sustainably want to feel these investments “do good”. It feeds back to the idea of wanting to leave things in a better position for future generations via investment choices.
The label was also the clearest to investors, with phrases like ‘clear goals’, ‘proactive’, ‘measurable’, and ‘primary non-financial aims’ being used when thinking about what funds might use it. However, the ‘focus’ label can feel synonymous with ‘impact’. Furthermore, some private investors felt it was relatively hard to define, using words like ‘vague’ to describe it.
The label with the least positive reception was ‘Sustainability Mixed Goals’. Some private investors felt that a fund using this may not hold sustainability at their core or be ‘muddying’ their commitment to sustainable aims.
Industry interpretation of SDR labels
| SDR label | FCA description | Private investor interpretation |
| Sustainability Focus | Products invest in assets that are environmentally or socially sustainable, determined by a robust, evidence-based standard of sustainability. | Investors broadly interpret this label to mean the fund aims to have a positive impact on the environment/ world, with a few mentioning renewables or reducing emissions |
| Sustainability Improvers | Product invest in assets that have the potential to become more sustainable over time, determined by their potential to meet a robust, evidence-based standard of sustainability over time. | Investors generally feel this label likely means that the fund’s objective is to focus on one area or theme within sustainability. A few mention minimum inclusion thresholds. |
| Sustainability Impact | Products seek to achieve a predefined, positive, measurable environmental and/or social impact. | Strong sentiment amongst investors that funds using this label are investing in companies looking to improve their sustainability credentials. |
| Sustainability Mixed Goals | Products invest in assets that meet or have the potential to meet a robust, evidence-based standard for sustainability, and/ or invest with an aim to achieve positive impact. | Many believe that funds using this label are investing in a mix of sustainable and non-sustainable companies or might be a combination of the other labels. |
Six keys to a successful SDR rollout according to private investors
Firms began using the labels, and accompanying disclosures on 31st May, with naming and marketing rules come into force on 2nd December. The initial reception to SDR was generally positive, with investors often showing an appetite for more reliable sustainability information and industry accountability amidst greenwashing fears. However, there’s a desire to wait and see how implementation pans out amongst private investors – particularly with the labels sometimes being indistinguishable.
The next few months will be integral to the smooth implementation of SDR, with firms adopting measures whilst trying to understand their client’s needs. As such, private investors have identified six core areas that are needed for a successful rollout.
- Clearer metrics and rankings within the four labels – some end investors suggested that there should be some type of ranking, or RAG system, to funds using the labels so they could see a list of ‘Impact’ or ‘Focus’ funds that are ranked 4/5 by a third party.
- Certification/badges for funds that meet the criteria – third party verification came through strongly in the study as a way in which funds can boost the sense of credibility by it feeling less like ‘marking their own homework’.
- A detailed explanation of each label’s focus – clearly there’s currently misalignment between interpretations of the label names and what the FCA says the focus of those funds will be.
- The FCA to highly publicise SDR in investment news – end investors would like to see more from the FCA on SDR in some of the financial publications they read, like Financial Times, Citywire, and others.
- More thorough disclosures on what companies meet the inclusion threshold – investors want to go ‘under the bonnet’ of a sustainable fund to see how and what it invests in would meet the criteria to use one of the 4 labels.
- Third-party videos on investing sustainably – investors are keen to see more ‘bitesize’ and visual information on investing sustainably so they can begin to place the FCA labels in context.
On the findings, Rachel Powell, Research Manager at Research in Finance, said, “With concerns for greenwashing, the SDR is a welcome introduction. We would hope that 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.
We believe 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”.
Methodology
Research in Finance Retail Consumer Interests Study – Wave 10 2023
The fieldwork was conducted in December 2023 amongst 509 UK private investors (non-advised) and 20 in-depth interviews. Those who took part in the survey (a mix of those currently investing sustainably and those open to the idea but not rejectors of the concept) were all recruited from Research in Finance’s own proprietary UK Private Investor Panel. To ensure a representative sample, participants had a mix of age ranges, an even split of gender, a mix of levels of investment knowledge/confidence, and some had vulnerable characteristics.
Research in Finance Retail Consumer Interests Study – Wave 11 2024
The fieldwork was conducted in May 2024. 30 end investors were recruited from Research in Finance’s own proprietary UK Private Investors Panel. Participants took part in a two-week online community including qualitative marcomms testing. To ensure a representative sample, participants had a mix of age ranges, an even split of gender, a mix of levels of investment knowledge/confidence, and some had vulnerable characteristics.
Five in-depth interviews were conducted amongst vulnerable investors less willing or able to participate in an online community. They used a trusted third-party specialist recruiter to find these respondents using the same criteria as above.
