UK's Sustainable Fund Naming and Marketing Rules (December 2024)

This report provides a detailed overview of the UK's sustainable fund naming and marketing rules that came into effect in December 2024. These rules, part of the broader Sustainability Disclosure Requirements (SDR) regime, aim to enhance transparency and prevent misleading claims in sustainable investment products. The report addresses the specific requirements for naming and marketing sustainable funds, examines how these rules promote transparency and prevent greenwashing, outlines penalties for non-compliance, identifies any exemptions, and compares the UK's approach to similar regulations in other jurisdictions.

Naming Requirements for Sustainable Funds in the UK

The UK's sustainability rules introduce strict naming conventions for sustainable funds to ensure clarity and accuracy in how these products are presented to investors.

To prevent funds from misleading investors with their names, the Financial Conduct Authority (FCA) has set out clear criteria for when funds can use certain terms. Funds using terms like "green," "climate," or "social" in their names must possess genuine sustainability characteristics. These characteristics should be "material to that product," with at least 70% of the fund's assets invested in line with its sustainability objectives¹. This threshold ensures that funds using these terms in their names are genuinely committed to sustainable investing.

Furthermore, funds using key sustainability terms in their names must meet specific threshold and exclusion requirements. They must allocate at least 80% of their investments to meet environmental and/or social characteristics or sustainable investment objectives, as outlined in their investment strategy². This ensures that the fund's investment strategy aligns with the sustainability-related terms used in its name. Additionally, certain investments, such as those related to fossil fuels or controversial weapons, may be excluded from funds using specific sustainability-related terms².

The FCA has also implemented temporary measures for funds using specific sustainability-related terms in their names, ensuring consistency with pre-existing guiding principles³. These measures provide further guidance to fund managers on how to apply the new naming rules.

Finally, index-tracking funds using sustainability-related terms must ensure the underlying indices comply with the SDR labeling and naming rules⁴. This ensures that the fund's sustainability claims are aligned with the underlying investments tracked by the index.

Marketing Requirements for Sustainable Funds in the UK

Alongside naming restrictions, the UK's sustainability rules include marketing rules to prevent greenwashing and ensure that sustainability-related claims are accurate and not misleading. These rules apply to all FCA-regulated firms when communicating with UK clients and promoting financial products within the UK⁵.

One of the key aspects of these rules is the requirement for clarity and accuracy in all sustainability claims. All claims must be clear, fair, unambiguous, and supported by verifiable facts⁵. This ensures that investors are not misled by exaggerated or unsubstantiated claims about a fund's sustainability characteristics.

To further enhance transparency, funds using sustainability labels or ESG-related terms in their names or marketing materials must provide consumer-facing disclosures⁶. These disclosures explain the key sustainability-related features of the product, helping retail investors understand how the fund incorporates sustainability considerations.

Furthermore, fund managers cannot use self-styled claims and must choose from four specific fund labels: "Sustainability Focus," "Sustainability Improvers," "Sustainability Impact," and "Sustainability Mixed Goals." ⁵ These standardized labels provide investors with a clear and consistent way to understand the sustainability objectives of different funds.

Products using investment labels must also meet five overarching principles⁷. These include having a clear sustainability objective, investing at least 70% of assets in line with that objective, identifying key performance indicators to measure progress, ensuring adequate resources and governance to support the sustainability objective, and disclosing a stewardship strategy.

In addition to consumer-facing disclosures, funds must also provide pre-contractual disclosures in documents like prospectuses⁶. These disclosures include more detailed information on the sustainability objective, investment policy, and relevant metrics.

Finally, funds are required to produce an ongoing sustainability product report, disclosed annually⁷. This report provides comprehensive information on the fund's sustainability characteristics and performance, allowing investors to track the fund's progress over time.

To ensure that investors receive the necessary information about a fund's sustainability features, the UK's sustainability rules also include requirements for distributors⁸. Distributors must communicate the sustainability label of the funds they distribute and provide access to consumer-facing disclosures. This ensures that investors have a clear understanding of the sustainability characteristics of the funds they are considering.

Entity-Level Disclosures

Beyond product-level disclosures, the UK's sustainability rules also introduce requirements for asset managers to produce sustainability entity reports⁹. These reports provide a broader overview of the firm's approach to sustainability, covering areas such as sustainability-related governance, risk management, and the firm's overall commitment to sustainability. This gives investors a more holistic view of the firm's sustainability practices and how these are integrated into its business operations.

Promoting Transparency in Sustainable Investment Products

The UK's sustainability rules promote transparency in several ways. The use of standardized labels helps investors easily identify and compare sustainable investment products¹⁰. Comprehensive disclosure requirements ensure that investors have access to detailed information about a fund's sustainability objectives, strategies, and performance⁸. The regime also mandates clear and accessible consumer-facing disclosures, enabling retail investors to understand the key sustainability-related features of a product⁸.

Key Insight: By providing investors with clear and comprehensive information, the UK's sustainability rules empower them to make informed investment decisions and hold fund managers accountable for their sustainability claims¹². This increased transparency fosters trust and confidence in the sustainable investment market.

Preventing Misleading Claims in Sustainable Investment Products

The UK's sustainability rules incorporate several mechanisms to prevent misleading claims, often referred to as "greenwashing." The anti-greenwashing rule requires all sustainability-related claims to be "fair, clear and not misleading," preventing exaggerated or unsubstantiated claims¹³. Strict naming and marketing rules restrict the use of sustainability-related terms unless funds meet specific criteria and use appropriate labels⁸. Firms must also ensure their sustainability claims are factually correct and not exaggerated, with robust and credible evidence to support them¹⁵. When relying on third-party information, firms must carefully assess the credibility and appropriateness of the data and resources used to substantiate their claims¹⁵.

Key Insight: By setting clear standards and requiring robust evidence for sustainability claims, the UK's sustainability rules contribute to market integrity. This ensures a level playing field and prevents unfair competition from funds making misleading claims¹³.

Penalties for Non-Compliance

Non-compliance with the UK's sustainability rules can lead to various penalties. These can include civil sanctions, such as stop notices, which halt business operations until the breach is rectified, or compliance orders, requiring specific actions to remedy non-compliance¹⁶. In cases of serious environmental harm, non-compliance can result in criminal prosecution, with potential fines and imprisonment for individuals responsible¹⁶.

The FCA also has the power to enforce the SDR through various measures, including issuing warnings or withdrawing authorization from firms that fail to comply¹¹.

Beyond legal penalties, non-compliance can severely damage a firm's reputation and erode investor trust¹⁷. Companies may also face financial losses due to fines, legal costs, and potential loss of business¹⁸. In some cases, penalties for non-compliance with ESG regulations can include fines of up to 5% of a company's net worldwide turnover¹⁸.

Exemptions to the Rules

While the UK's sustainability rules apply broadly, certain exemptions exist. For example, small-scale self-build and custom housebuilding developments with no more than nine dwellings, on sites no larger than 0.5 hectares, are exempt from the Biodiversity Net Gain requirement¹⁹. Overseas funds not subject to the UK SDR regime are required to have a notice attached when distributed in the UK⁸. It's important to note that these exemptions may be subject to specific conditions and limitations.

Implementation Timeline

The UK's Sustainability Disclosure Requirements (SDR) are being implemented in phases over a three-year timeframe⁵. The anti-greenwashing rule took effect on 31 May 2024, and the new labelling regime came into effect on 31 July 2024. The naming and marketing restrictions, along with the consumer-facing disclosure requirements, took effect from 2 December 2024. This phased approach has allowed firms time to adapt to the new requirements and ensure compliance.

Comparison with Similar Regulations in Other Countries

The UK's sustainability rules share similarities with regulations in other jurisdictions, particularly the EU's Sustainable Finance Disclosure Regulation (SFDR), but also have distinct characteristics.

While the UK's labeling regime is more prescriptive, the EU SFDR has a broader scope, encompassing various aspects of sustainable finance beyond fund labeling¹⁰. The US is also developing ESG regulations, but these are still evolving²⁰. For example, the US Securities and Exchange Commission is proposing amendments to the "Names Rule" to address greenwashing concerns in fund names²⁰.

Other jurisdictions, such as Australia and Canada, are also implementing their own sustainable finance regulations, with varying approaches to disclosure, labeling, and preventing greenwashing²¹. These developments reflect a growing global trend towards greater transparency and accountability in sustainable investing.

Conclusion

The UK's sustainable fund naming and marketing rules represent a significant step towards greater transparency and accountability in the sustainable investment sector. By introducing strict requirements for naming, marketing, and disclosure, the new sustainability regulations aim to protect investors from greenwashing and enable them to make informed decisions. While the regime shares some similarities with regulations in other jurisdictions, it has a distinct focus on consumer protection and standardized labels.

These rules are likely to have a significant long-term impact on the UK's sustainable investment market. By promoting transparency and preventing misleading claims, the rules can help build investor trust and confidence in sustainable investment products, leading to increased investment in companies that are committed to sustainability. This, in turn, can contribute to the UK's efforts to achieve its national and international sustainability goals.

It is anticipated that the UK's sustainability rules will continue to evolve as the sustainable investment market matures and new challenges emerge. The FCA has indicated that it will conduct a post-implementation review of the SDR and labeling rules in 2027 to assess their effectiveness and make any necessary adjustments²². This ongoing review process will ensure that the rules remain relevant and effective in promoting transparency and preventing greenwashing in the UK's sustainable investment market.

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