Earlier this year, the Financial Conduct Authority (FCA) introduced a set of new measures aimed at ensuring funds marketed as ‘sustainable’ are genuinely living up to that promise. Designed to combat greenwashing, where investments are labelled as ethical or eco-friendly without backing it up, the Sustainability Disclosure Requirements (SDR) and a new labelling system are a major step forward in restoring credibility and clarity in sustainable investing.

But while these rules are well-intentioned, they’ve come with a catch: many retail investors may now find themselves paying higher fees when trying to invest in line with their values, and not by choice.

What Are the FCA’s New Sustainability Labels?

From 31 July 2024, UK fund managers can apply one of four labels to qualifying investment products:

• Sustainability Focus – funds that invest mainly in assets that meet a credible sustainability standard.
• Sustainability Improvers – funds aiming to invest in assets that are improving on sustainability measures.
• Sustainability Impact – funds that target positive, measurable environmental or social outcomes.
• Sustainability Mixed Goals – funds combining more than one of the above objectives.

These labels are voluntary, but they’re subject to strict criteria. To qualify, fund managers must show clear sustainability objectives, robust methodologies, ongoing monitoring, and evidence of how outcomes are being achieved.

They must also adhere to anti-greenwashing rules, which ban misleading marketing language and ensure sustainability claims are fair, clear and not misleading.

The Unintended Consequence: Fewer Passive Options

Here’s the problem: very few low-cost, passive funds are currently able to meet the FCA’s strict new labelling criteria.

Passive funds typically track indexes rather than hand-picking companies based on sustainability goals. While some ESG-tilted indexes exist, they often fall short of the evidential bar now set by the FCA. As a result, many of the funds that do meet the criteria are actively managed and come with significantly higher fees.

This creates a frustrating contradiction: investors are being nudged towards more sustainable choices on an ethical level, but those choices are now more expensive, especially for long-term savers using ISAs, pensions, or investment platforms to build ethical portfolios.

What Does This Mean for You?

• Higher costs for sustainability-minded investors: Without cheap, passive options, many investors must now pay higher ongoing charges to align their investments with their values.
• Limited accessibility: Sustainable investing risks becoming a privilege for those who can afford to pay more, undermining inclusivity and consumer choice.
• Potential for lower returns: Over time, higher fees can eat into investment returns, particularly for those making regular contributions over decades.
• Green confusion: Investors may be left uncertain whether a fund that isn’t labelled sustainable is any less ethical, or simply didn’t meet technical requirements under the new framework.

Our Thoughts

Go green or go home. Many portfolio fund managers and financial advisers have selected passive ethical funds for their portfolio to tick a marketing box.
Investors need to be able to choose between sustainability and growth. It may be likely that sustainable funds will cost more and may not perform as well, however they also may suddenly surpass the performance of tradition equity funds as investment trends change.
Taking measures to accurately label funds, avoid misrepresentation and allows those funds who are taking ethical and sustainable strides to compete on a level playing field both in terms of performance and their associated fees.

Is There Any Recourse for Investors who have been misled into believing a fund was sustainable?

At this stage, the issue is more about market structure than misconduct, so most investors aren’t in line for financial redress. However, the situation does raise important questions about transparency, fairness, and investor choice.

If an adviser, platform, or fund manager promoted a product as sustainable when it wasn’t, or failed to disclose key information about costs, then you may still have grounds to complain, especially if it affected your ability to make an informed decision.

At Claim My Loss, we help consumers understand their rights when it comes to financial products that were misrepresented, mis-sold, or poorly explained. And as the FCA continues to reshape the investing landscape, we’ll be watching closely to ensure consumer interests remain front and centre.

Looking Ahead

The FCA’s drive to clean up the world of sustainable investing is a vital and overdue step. But as with many reforms, it’s creating growing pains, and right now, the burden is falling on the individual investor.

The hope is that over time, more index providers and passive fund managers will adapt to the new rules, creating affordable, accessible sustainable products for the mainstream market.

Until then, investors should stay alert, read the small print, and ask questions, especially around fees, fund strategy, and whether a product truly aligns with their values.

If you would like more guidance on the misrepresentation of sustainable funds you can get more information from our Sustainable investment Claims page.