Anyone that follows developments in sustainable fund investing will have noticed a big shift in the regulatory landscape over recent months.
It hasn’t always been easy for investors to find sustainable options among the best funds or investment trusts, even though all investing – at the very least, all long-term investing – should be ‘sustainable’ in the broadest sense. While everyone wants their investments to generate the maximum returns over time, many investors are understandably also concerned about the impact that their money has.
This is especially true among younger investors, with 86% of gen Z (18-29 year olds) and 73% of millennials (30-44 year olds) saying they would rather retire later than have their pension pot investing in industries that harm the environment, according to a survey by investment platform Moneyfarm.
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The same survey also found that less than a third (31%) of investors across all age groups have no ethical concerns at all about investing in any sector.
Picking high-performing sustainable funds is difficult, though. The recent macroeconomic climate, characterised by elevated global inflation and interest rates, are not conducive to the kind of long-term, capital-intensive projects that most sustainable investment funds focus on.
Sustainable companies face political headwinds, too, especially with the return of Donald Trump to the White House.
“It is safe to say that the outlook for the green economy looks uncertain within the US,” says Gemma Woodward, head of responsible investment, Quilter Cheviot. “The decision to exit the Paris Agreement for the second time will leave the US as one of only four countries that are not signatories – the others being Iran, Libya, and Yemen.
“However, there is a clear bifurcation between the US and Europe/UK governments – we have seen this clearly in their approach to sustainable investment. For example, US asset managers have been under pressure to exit climate-related collaborations, while the EU and UK have introduced regulations to promote sustainable investment,” Woodward adds.
Unclear labelling, though, hasn’t helped would-be sustainable fund investors. Traditionally, “ESG” – environmental, social and governance – has been the designation for sustainable funds that make a positive impact. However, ESG investing is undergoing a rethink, and in May 2024 the Financial Conduct Authority (FCA) announced new sustainability labels for green investment funds.
What are the new sustainability labels?
The new Sustainability Disclosure Requirements (SDR) labels came into effect at the end of July, two months after anti-greenwashing rules were implemented.
Under the new rules, UK funds can no longer call themselves “sustainable” unless they also adopt one of the four labels. Each of these has a more precise set of objectives, and funds adopting one must be able to demonstrate that 70% of its investments align with the objective. The four labels are:
- Sustainability focus: investments in assets that can be shown, using a robust evidence-based standard, to be environmentally and/or socially sustainable;
- Sustainability impact; investments in solutions to problems that affect people on the planet, especially in underserved markets or to address market failures, making a measurable real-world impact;
- Sustainability improvers: investments in assets that may not be sustainable now but have the demonstrable potential to be so in the future;
- Sustainability mixed goals: funds that invest across different sustainability objectives and strategies aligned with the other three categories.
To begin with, funds were required to comply with the new regulations by 2 December 2024. However, the deadline was extended to 2 April 2025 for firms that had submitted an application by 1 October 2024 but were waiting for it to be approved.
As of 24 January, over 70 funds had gained approval for one of these sustainability labels from the FCA, according to the Investment Association. Of the four labels available, funds applying the ‘Sustainability Focus’ label have had the most approvals (more than 40), followed by ‘Sustainability Impact’ at a little under 20.
Different fund managers have adopted the labels at varying speeds. Schroders was an early adopter; it announced approvals for ten of its funds on the initial 2 December deadline. Recently, its high net worth wealth management subsidiary, Cazenove Capital, announced that it was adopting the ‘Sustainability Focus’ label for three of its funds.
“We are proud to be one of the first wealth managers to announce the planned adoption of the sustainability labels,” said Emilie Shaw, sustainable solutions lead at Cazenove Capital. “This milestone underscores our enduring commitment to aligning clients’ assets with their values, and solidifies our position as one of the premier choices for sustainable wealth management solutions.”
On 27 January it announced its intention to adopt all four labels across its portfolio of funds, with the sustainability impact label being applied to its Capital Real Estate Impact Fund and BSC Social Impact Trust, the sustainability improvers label for its European Sustainable Equity fund, and the sustainability mixed goals label for its Sustainable Future Multi-Asset Fund.
What are the benefits of investing in sustainable funds?
No-one seriously thinks that climate change can be reversed just through investors selecting certain funds over others. However, there are sound ethical reasons why investors might not want to feel like they are profiting from companies that are contributing towards environmental degradation.
There is also a strong business case for sustainable investing. Cyclical factors have weighed on sustainable funds’ performance over recent years, but the long term facts are that the financial costs of climate change are soaring (the Swiss Re Institute estimates these at $320 billion in 2024, up from $302 billion in 2023), and as such the incentives for governments and corporations to invest in climate change prevention and mitigation are increasing.
“Whilst there could be policy disruptions, the transition towards a cleaner economy has strong momentum,” says Damien Lardoux, head of impact investing at EQ Investors. Lardoux’s comments predated Donald Trump withdrawing the US from the Paris Agreement and rowing back on clean infrastructure spending, but on a global, long term scale, it remains valid.
What has happened to ESG?
Schroders’ 2024 financial advisers survey revealed some troubling findings as far as advocates of ESG investing are concerned. The 293 advisers that responded to the survey revealed a drop in investor appetite for ESG funds, with the proportion of respondents saying that less than a quarter of their clients had explicitly specified ESG as a requirement for the investments rising to 84% this November, from 77% a year prior.
25% of respondents said they had noticed a decrease in the number of clients seeking sustainable solutions, compared to 19% that had noticed an increase. This is a drastic fall from three years ago, when 75% of respondents said they had noticed an increase.
Fidelity International, though, found that there is ongoing appetite among investors for ESG factors. 33% of respondents in a survey of over 120 institutional investors and intermediaries rated ‘E’ (environmental) factors as of the highest importance, with a further 30% rating it as moderately important. 51% of respondents gave one of these two ratings to ‘S’ (social) factors, and 58% said the same for ‘G’ (governance) factors.
“We believe the integration of sustainability into investment research and portfolio construction is important as it can impact long-term value creation and drive better client outcomes,” said Jenn-Hui Tan, chief sustainability officer at Fidelity International.
Four sustainable funds
Four of the funds that have already either adopted an SDR label or stated their intention to do so are:
Schroder Global Sustainable Value Equity Fund
SDR label: Sustainability focus
3 year annualised return: 6.4%
The Global Sustainable Value Equity Fund, was one of Schroders’ first products to be approved for an SDR label, back in December, and adopted the most popular sustainability focus label. This actively-managed fund targets attractive valuations and business quality while maintaining a lower weighted average carbon intensity than its benchmark index (the MSCI World ex Australia ex Tobacco Index).
Greencoat UK Wind
SDR label: Sustainability focus
5 year share price annualised return: 2.0% (as of 24 January 2025)
5 year NAV annualised return: 11.8% (as of 24 January 2025)
One of the UK’s most popular sustainable investment trusts, Greencoat (LON:UKW) invests in operating UK wind farms. It aims to offer investors an annual dividend that increases in line with inflation – its yield currently stands at 8.2% according to Hargreaves Lansdown – and trades at a 25.4% discount to NAV.
Liontrust UK ethical fund
SDR label: Sustainability focus
5 year annualised return: -0.7% (as of 24 January 2025)
While this fund’s long term performance has been hindered by particularly steep losses during 2022, it has been one of the top-performing sustainable funds in recent months. Interactive Investor highlighted it as one of the top five ACE 40 funds in Q3 2024 with returns of 5.16% during the quarter. In the year to 24 January, the fund has returned 14.1% according to Morningstar.
Baillie Gifford Positive Change Fund
SDR label: Sustainability impact
5 year annualised return: 12.2% (as of 24 January 2025)
This fund invests in companies whose products and/or services address critical social and/or environmental challenges: its second top holding, as of 31 December, was MercadoLibre (NASDAQ:MELI), which has been credited for improving financial inclusion in Latin America. It is one of the top performing funds to hold the sustainability impact label.
Note: all fund returns data from Morningstar unless specified.
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