So far the UK's sustainability regime is off to a good start, but there are certain factors that will yet determine its success.
To be successful, a product-quality labelling programme must navigate three hurdles.
The first hurdle, the development of the label, was completed in November 2023 when the Financial Conduct Authority issued its policy statement “Sustainability disclosure requirements and investment labels” (PS23/16).
This entailed making numerous decisions regarding the underlying technical standards, the process of verifying that a product complies with the standards, and programme governance.
The second hurdle is adoption by manufacturers – or in this case, asset managers.
Based on a survey conducted from March to April 2024, the Investment Association estimates approximately 200 of the roughly 3,200 funds managed by the 68 survey respondents will be labelled.
This represents about 6.25 per cent of the population but seems to be on par with adoption of similar labels in other markets: 264 funds carry a LuxFlag label (Luxembourg), 106 funds carry a Greenfin label (France), and 1,516 funds carry a FNG-Siegel label (Germany, Austria, and Switzerland).
The final hurdle is demand by consumers – or in this case, investors.
Given that the first UK sustainability labels have been issued only in the past few months, it is too early to assess investors’ appetite.
As this story unfolds, observers should understand that the demand for sustainability labelled funds is driven by several factors.
One factor is the importance investors place on sustainability considerations versus risk and return considerations. I suspect the relatively high number of FNG-Siegel labeled funds reflects the relatively high value that the Germans, Austrians, and Swiss place on nature. It is difficult to quantify this preference, but it is clear in the laws, customs, and cultures of these countries. Comparatively, the value placed on nature is lower in the UK, and thus, I expect demand to be more akin to the LuxFlag and Greenfin labels.
Another factor is marketing. I am curious to see how prominently the UK sustainability labels will appear in asset manager’s marketing and advertising and what efforts the FCA will make to educate investors about the differential value of sustainability labelled products. The more marketing and education, the greater the demand will be.
A final factor is trust. The UK sustainability labelling programme is different than other voluntary labelling programmes because it was developed, and will be enforced, by a regulator. In theory, this should increase investors’ confidence that a fund with a sustainability label has clearly stated sustainability objectives and appropriate mechanisms to deliver those objectives.
Over the coming months and years, I am certain there will be many attempts to gauge the success of the UK sustainability labelling programme.
The market share of sustainability labeled funds – whether expressed as a number of funds, a percentage of funds, or percentage of assets of under management – will surely be a key indicator.
