The Financial Conduct Authority labelling regime aims to qualify sustainable investment funds, consumer-facing disclosures, pre-contractual and ongoing fund disclosures, and fund manager disclosures.  

The new Financial Conduct Authority (FCA) labels will increase trust in sustainability claims for most financial advisors and wealth managers, according to the annual ESG Attitudes Tracker from the Association of Investment Companies (AIC). 

Nearly two-thirds (64 per cent) of intermediaries said the labels would increase their trust' this number was higher among wealth managers (78 per cent) than financial advisors (55 per cent). The study was carried out by Research in Finance among 202 intermediaries as part of the ESG Attitudes Tracker, which also covers private investor sentiment towards ESG, the firm said in a statement.

Of the four labels, the sustainability focus label is most likely to be used for screening purposes, with 54 per cent of intermediaries saying they would use it in this way. The sustainability impact label was the second most popular (52 per cent of respondents), followed by sustainability improvers (47 per cent) and finally sustainability mixed goals (37 per cent).

However, there were concerns about the low numbers of funds with labels, as well as how labels (or lack of them) could affect the funds that intermediaries currently use. “I don't know where the funds I’ve got are going to end up sitting on those labels. I've got some that are based in Ireland, so they're not going to be subject to it… My concern will be whether there are enough companies that can make a diversified portfolio,” one wealth manager said. 

The labels have been positively received among private investors. Nearly two-thirds of private investors surveyed (63 per cent) said they would increase their trust in funds’ sustainability claims, with this rising to 71 per cent among those who already held sustainable investments.

“Advisors and wealth managers have given a cautious welcome to the FCA’s new labels; it’s clear they would increase trust and that many would use them for screening purposes. However, questions remain about whether the universe of labelled funds will be large and diverse enough to build a portfolio, as well as concerns about what happens to funds that have been presented as sustainable but don’t claim a label,” Nick Britton, research director of the Association of Investment Companies (AIC), said.

“One key concern is that the labelling regime currently only applies to UK funds, excluding those based overseas. This means that many of our member companies in the renewable energy infrastructure sector, for example, are outside the scope of the regime, though they may have impeccable environmental credentials,” he said.

Attitudes to ESG investing and performance
Opinions on ESG investing in general appear to be stabilising, with 57 per cent of intermediaries saying there had been no change in their opinion since last year, 24 per cent saying it had grown more favourable, and 17 per cent less favourable. This is in contrast to previous years, in which opinions had shifted more strongly in a more favourable direction, the study shows.

Nearly three quarters (73 per cent) thought that investing should make a positive difference as well as provide a financial return, the same as last year. Intermediaries generally associated ESG with positive words, with 85 per cent opting for “sustainable” and 80 per cent “responsible,” but only 16 per cent “woke” and just 4 per cent “pointless.”

However, expectations of performance have shifted more sharply. Only 19 per cent of intermediaries expect ESG investing to improve performance, compared with 30 per cent who said it would worsen performance, the study reveals. Optimism has trended downwards since 2021, when 47 per cent of respondents thought ESG investing would help performance, and only 16 per cent thought it would be a hindrance. Wealth managers are more optimistic about performance than advisors.

“One of my clients has always been an ESG investor and things have gone awry...she used these words herself, 'can we start doing a softer ESG approach?'” one advisor said.

Others believe that the performance of ESG strategies is likely to be cyclical. “Like with anything, as soon as these things start to pick up again, we'll start getting a flood of people that are interested in ethical investing once again,” another respondent said.

Demand for ESG
Most respondents (60 per cent) expect demand for ESG strategies to increase over the next 12 months, with only 10 per cent expecting it to decline. However, comparisons with previous years suggest that this growth in demand is slowing. In 2021, 91 per cent of respondents expected demand for ESG to increase, declining to 80 per cent in 2022 and 72 per cent in 2023.

But the percentage of intermediaries recommending sustainable funds has held steady at 89 per cent, the same as in 2021. On average, 18 per cent of client assets are held in sustainable funds, similar to previous years.

The percentage of clients who proactively raise the topic of ESG in meetings has declined to 13 per cent, from 20 per cent in 2022 and 15 per cent in 2023. Yet intermediaries believe that client appetite is still the main driver of ESG demand, with 53 per cent of respondents holding this view.

Views on ESG ratings and reporting
The perceived usefulness of third-party ESG fund ratings has steadily declined, with 60 per cent of respondents finding them helpful compared with 73 per cent in 2022 and 65 per cent in 2023. Only 21 per cent of intermediaries say they trust ESG ratings.

Of those who refer to asset managers’ ESG reporting, around two-fifths (42 per cent) are satisfied with all or most of it – a similar result to previous years. The most useful ESG disclosure is considered to be the overall social and environmental impact of a fund versus its benchmark, with 71 per cent of respondents finding this to be important, followed by details of any positive screening policy (69 per cent), the asset manager’s experience or track record in ESG investing (67 per cent), a detailed impact report for each fund including case studies (67 per cent), and details of negative screening or exclusions (63 per cent).

The ESG Attitudes Tracker research consisted of an online survey of 400 private investors and 202 intermediaries (financial advisors and wealth managers) conducted between 8 July and 31 July 2024. This was supported by 10 in-depth interviews with private investors, conducted between 30 July and 19 August 2024, and 10 in-depth interviews with intermediaries, conducted between 22 July and 4 September 2024.

The ESG Attitudes Tracker is an annual sentiment tracking survey that has been conducted every year since 2021.