More than half (52%) of retail investors are aware of the FCA’s Sustainability Disclosure Requirement (SDR) investment labels but vague wording and jargon remain the biggest barriers to investment in sustainable funds.

Research from The Investment Association and The Wisdom Council found that almost all investors (94%) said labelling for sustainable investment would be helpful.

However, for around half of investors vague words, jargon and a lack of detail on fund documentation created barriers to investing in these funds. 

Investors’ understanding of sustainability-related terms also varies and very few said they had heard of concepts like ‘Positive Tilt’ (17%) or ‘Paris-aligned’ (15%) and would require further explanation.

Almost half (46%) of investors aware of the labels had been told by their adviser, highlighting the important role advisers play in sharing key regulatory updates.  

On the adviser side, almost four out of five (86%) said they were aware of the labels, and more than three quarters (77%) were confident they understand enough about the labels to choose funds appropriate for their clients’ sustainable preferences.

Among advisers expecting to use labels, Sustainability Mixed Goals (35%) was expected to be used the most when selecting funds for clients, followed by Sustainability Impact (29%). Sustainability Focus was expected to be used the least by advisers (16%).

The research showed that changing the fund name because of SDR, for example to remove sustainable terms from the names of funds without a label, will not necessarily trigger sales.

Only 6% of retail investors surveyed said they would sell a fund if it didn’t meet the new criteria for a sustainability label. However, a higher percentage of advisers (one in five) would sell or switch if a fund didn’t meet the criteria for a label.

Younger investors are more aware of the new SDR labels, with two-thirds (63%) of Gen Z and Millennial investors aware of the regime, compared to a third (34%) of Gen X and a quarter (26%) of Baby Boomers.

Green investment is high on the agenda for financial advisers, with nearly half (48%) ‘always’ speaking to clients about sustainability, and 92% reporting an increased appetite for sustainable investment from investors.

However, the research showed that the final decision on whether to invest in sustainable funds or products comes down to return – 55% of investors would consider return more important, compared to just 8% who would consider sustainability top of mind.

Miranda Seath, director of market insights at the Investment Association said: “The end goal of the SDR and labelling regime is to bring greater transparency and consumer confidence to the market for sustainable investment products.

“However, the labels are only a starting point. Investors want to understand from fund managers how their money will be invested and to what end before selecting a sustainable fund and ideally want to see real-life examples of how the funds make a difference.

“Vague words, jargon and a lack of detail create barriers to understanding. Clear and accessible language is central to giving investors confidence in their decision-making – and this must remain front of mind for fund managers, advisers and regulators as label uptake increases.”

• The IA and The Wisdom Council surveyed 1081 UK retail investors with a propensity to invest sustainably between the 10 and 23 December 2024