What are the new changes to sustainable investment labelling?

As nothing seems to be straightforward when it comes to sustainable investing, here’s your simple Guide to the UK’s new rules on sustainable investing and how they will affect you. 

In a world where “going green” isn’t just about recycling your old tin cans, sustainable investing has become the talk of the town. Women particularly feel the importance of aligning investments with sustainable goals.  But as with all good things, the devil is in the details. The UK government recently decided to shake things up with new rules for sustainable investment labelling. What does that mean for you? Let’s break it down.

What Exactly Is Sustainable Investing?

Before we dive into the changes, let’s recap and get on the same page about what sustainable investing actually is. Imagine you’re putting your money into companies that not only make a profit but also do good for the environment, society, or promote good governance—this is often referred to as ESG (Environmental, Social, and Governance) investing. For example, you might invest in a company that’s committed to reducing its carbon footprint, pays its workers fairly, or has a diverse board of directors.

The Need for New Rules: Clearing Up the Confusion

So, why did the UK government feel the need to change things? Well, frankly the world of sustainable investing has become a bit like the Wild West. Different funds and companies were labelling themselves as “sustainable,” but the definitions were all over the place. One company’s idea of “green” might involve planting a single tree while another could be overhauling its entire supply chain to reduce emissions. Investors were understandably left scratching their heads, unsure of what they were actually supporting with their hard-earned cash.

Enter the Financial Conduct Authority (FCA) – the UK’s financial watchdog. They decided it was time to bring some order to the chaos with new rules on sustainable investment labelling.

The Big Changes: What You Need to Know

The FCA’s new rules are all about transparency and consistency, ensuring that when a fund or product is labelled as “sustainable,” it genuinely is. Here’s a breakdown of the key changes:

1. Clear Labels for Sustainable Investments

Under the new rules, funds will have to meet strict criteria to use labels like “sustainable” or “ESG.” This is to stop “greenwashing” – where companies make exaggerated or false claims about how environmentally friendly they are. If a fund says it’s sustainable, it’ll now need to prove it with solid data and transparent practices.

Example: Imagine you’re buying a carton of organic milk. You’d expect it to be free of nasty chemicals, right? The new rules make sure that if a fund is labelled “sustainable,” it actually meets certain standards—no sneaky business.

2. Three New Labels: Sustainable Focus, Sustainable Improvers, and Sustainable Impact

To help investors understand the level of sustainability they’re dealing with, the FCA introduced three new labels:

• Sustainable Focus: This is for funds that primarily invest in companies with a strong ESG track record. Think of it as putting your money into companies that are already doing good things.
• Sustainable Improvers: These are funds that invest in companies that might not be perfect but are committed to improving their ESG practices. It’s like betting on a horse that’s in training to win the next race.
• Sustainable Impact: This label is for funds that target companies or projects specifically designed to have a positive environmental or social impact. These are your heavy hitters, like investing in renewable energy projects or affordable housing.

Example: If you’re someone who loves cheering for the underdog, you might go for a “Sustainable Improvers” fund. You’re investing in a company that’s on a journey to become greener, just like cheering on your local football team to climb the league.

3. No More Misleading Terms

The FCA’s new rules also crack down on the use of vague terms like “green,” “ethical,” or “responsible” unless they’re backed up by concrete criteria. This way, you won’t be misled by fluffy language that doesn’t mean much.

Example: Think of it like food labelling. If something says “low-fat,” you’d expect it to meet specific health standards. Now, investment funds have to do the same—no more throwing around terms like “green” without backing it up with real action.

How Will These Changes Affect You?

So, how do these changes impact your investment decisions? Here are a few ways:

• Better Information: You’ll now have clearer, more accurate information about where your money is going. If you care about saving the rainforest, you can choose a fund that’s actually helping to save the rainforest, not just talking about it.
• More Confidence: With stricter rules in place, you can feel more confident that your sustainable investments are truly making a difference. No more worrying if you’re accidentally investing in something that’s not as green as it claims to be.
• More Choices: The new labels give you more options to match your personal values and goals. Whether you want to support companies that are already leading the way or those that are improving, there’s a clear choice for you.

Final Thoughts: The Road Ahead

The UK’s new sustainable investment labelling rules are a big step forward in making sure that when we invest in the future, we’re really investing in a better one. It’s all about cutting through the jargon and giving you the tools to make informed decisions.

So next time you’re thinking about where to put your money, remember these new labels and what they stand for. Whether you’re saving for retirement, your kid’s education, or just trying to make a little extra cash, now you can do it with a bit more peace of mind, knowing that your investments are hopefully helping to build a greener, fairer world.

And who knows? Maybe in a few years, you’ll be able to sit back, sip on your sustainably sourced coffee, and take pride in the fact that your investments are part of the solution, not the problem. Cheers to that!