This label came about from FCA consultation and is effectively for products that have an element of the other three labels.
The four labels, which are not designed to be in a hierarchy, are only for products seeking positive sustainability outcomes, which means that only a subsegment of funds that use environmental, social, and governance factors in their investment strategy can qualify.
Funds that just employ exclusions, negative screening, ESG integration, or basic ESG tilts alone will not qualify for a label.
The four labels are also not only being proposed for individual funds produced by asset managers but in future also to portfolio managers, or DFM providers running model portfolio service and fund of funds.
So, given the new labels, what does this mean for advisers?
Generally speaking, advisers themselves ought to understand the funds they are recommending in light of any labelling changes, whether they are self-selecting or using a DFM.
By doing so, advisers can then communicate these changes and make sure they capture client preferences, by mapping their demand to these potentially new labelled funds.
It is likely that many adviser firms already have processes in place to identify and discuss sustainability-related client preferences in response to the increasing availability of sustainable funds.
Making sure clients also understand the nuances and differences between these new labels will be just as important, as stressed by consumer duty.
Also, under the new regime, fund managers should provide “consumer facing disclosures” to investors.
This is meant to be a specific summary document for retail investors that summarises the sustainability characteristics of the fund.
It should contain details about the label. The document should also include the investment policy (including what it will and will not invest in), and relevant sustainability metrics with signposting to more detailed information.
Distributors must then publish these consumer-facing disclosures at the same time as the label is first used, ensuring relevant naming and marketing rules are met.
Advisers should therefore guarantee that this document as well as any other associated disclosures – including pre-contractual (more detailed sustainability information than contained in the CFD, which is expected to be included in the fund’s prospectus), ongoing product-level disclosures (sustainability report produced annually) and on-demand product level disclosures (sustainable information pertaining to private funds) – required by the SDR are passed onto clients, and that they are understood.
Other best practices include reviewing both label and disclosures referenced in any fund promotions.
Where adviser firms provide fund information on their website, they will need to include label and disclosure information there too.
What is just as important is if a fund uses sustainable terminology in its name and or/marketing, but chooses not to have a label, it must disclose this and provide its rationale in the CFD.
