Up to 300 funds are expected to assign themselves a sustainability label this year, as part of new rules from the UK’s financial regulator.

In November, the Financial Conduct Authority (FCA) unveiled a labelling regime for investment products wishing to market themselves as considering environmental and social issues. It identifies four legitimate approaches, including targeting real-world impact and supporting companies that are transitioning to more sustainable practices.

A report published today by research house Morningstar predicts that “about 300 UK open- and closed-end funds will opt for a label by year-end” under the framework.

According to the research, the most popular label for managers will be ‘sustainability focus’, which requires a fund to invest in sustainable assets. This includes thematic strategies such as renewable energy or energy efficiency.

The least popular option is expected to be ‘sustainability impact’, through which a fund must target predefined, measurable social and environmental impacts.

“It’s likely that funds with similar aims could elect different labels, highlighting that labels can only be one indicator for investors, to be analysed in conjunction with other fund data and information,” said Morningstar.

Altogether, labelled funds could end up representing 8% of all those domiciled in the UK, falling to 3% for all funds that are available for sale in the country.

“This is an optimistic scenario,” Morningstar said, adding that the conclusions are based on a combination of discussions with asset managers, the firm’s “knowledge of the UK fund market”, and data.

When the FCA finalised the rules in November, it included changes to make them less prescriptive. However, Morningstar said that some managers will still consider the regime too restrictive, and will choose not to align with one of the four options. Others will wait and see how the market develops, it predicted.

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