What are sustainable funds?
For investors seeking both financial returns and positive impact, the landscape has often been confusing. Different fund names, a variety of terms, and a lack of agreed standards created a maze.
Investors often find it difficult to understand terms like ‘ESG’ (environmental, social and governance), ‘green’ and ‘sustainable,’ and determine whether the claims around them are legitimate.
While there are still complexities in this area, the launch of a set of labels for funds last year has brought much-needed clarity. These are known in the industry as SDR (Sustainability-Disclosure Requirements) labels. They are designed to show investors which investments meet a high standard of sustainability.
Overseen by the UK financial regulator, the Financial Conduct Authority, there are now four labels which provide greater understanding for this type of investing. Labelled funds must meet a high standard and provide evidence to back up claims of positive environmental or social impact.
Investors prioritising sustainable investing should therefore be able to make easier comparisons between products and have greater confidence a fund meets their needs
The four labels are:
- Sustainability Focus: Funds investing towards positive environmental and social outcomes, investing in assets that already meet a robust, evidence-based standard of sustainability.
- Sustainability Improvers: Funds investing in assets not considered sustainable now but have a sound strategy to make meaningful improvements. For example, shares in an oil company with plans to invest significantly in renewables.
- Sustainability Impact: Funds investing in assets making a specific and measurable positive environmental or social impact. The role of fund manager is assessed on an ongoing basis to demonstrate this as well as the assets themselves.
- Sustainability Mixed Goals: Funds investing in a combination of the above approaches. At least 70% of assets must be in line with the respective objectives for each part, and no holdings must conflict with any.
Eligible UK-domiciled products have been able to apply for and use the new sustainable investment labels since 31 July 2024. Asset managers also need to produce new sustainability-related documents for investors. However, the labels do not currently apply to non-UK domiciled funds, so most ETFs for instance are not covered by the rules.
To qualify as a sustainable fund, at least 70% of the assets of a fund must be invested according to its sustainability objective. The remaining assets must not conflict with the objective, but they don't have to meet it exactly.
Information relating to the fund’s sustainability is published in documents available alongside other product literature such as the fund factsheet, KIID (Key Investor Information Document) and prospectus. The main source for retail investors is a brief consumer document covering the key sustainability-related features of the fund. This explains what the fund’s label means, outlines the sustainability objectives and investment approach, and describes how sustainability performance is measured.
More detailed disclosures are available in other documents, including in the fund prospectus if applicable. Ongoing disclosures on how the fund is performing according to its sustainability objectives will also be reported regularly.
Watch Paris Jordan, Charles Stanley’s Head of Responsible Investing, explain what the new sustainable fund labels mean for investors.
Funds on the Charles Stanley Preferred List with sustainable labels
Several funds on our shortlist of preferred funds for new investment by self-directed investors have a label as follows:
Baillie Gifford Positive Change – Sustainability Impact
This global fund aims to contribute toward a more sustainable and inclusive world with an investment process that embraces four ‘impact themes’: Social inclusion and education, environment and resource needs, healthcare and quality of life and ‘base of the pyramid’ (addressing the basic needs of the global poorest).
FP WHEB Sustainability Fund – Sustainability Impact
A well-regarded specialist in this area, WHEB targets sustainable companies from around the world that are expected to contribute to a positive impact on the climate and ecosystems. Primarily, this is through activities that deliver cleaner energy, reduced waste, better water management and improved resource efficiency.
Schroder Global Energy Transition Fund – Sustainability Focus
This specialist fund invests in companies making a positive contribution to the transition to lower carbon energy sources. This can be anywhere in the supply chain from energy production, distribution, storage, through to transport and the supply of materials and technology.
Liontrust Sustainable Future UK Growth – Sustainability Focus
A UK fund option investing in companies that meet the managers’ rules for promoting positive environmental and social outcomes, as well as increasing the resilience of systems we depend on. The portfolio is constructed from high-quality businesses thought to benefit from long-term structural trends.
What about other funds and ‘responsible’ products?
It’s important to recognise that many funds will not have a sustainable label. The requirements are quite precise, and not all broader ‘responsible’ or ‘ethical’ funds meet them, especially if they are passive funds that aim to follow a given index rather than taking an active approach. As at May 2025, there were 106 funds with labels and 341 funds with ‘sustainability characteristics’ currently unlabelled.
Screening out or using ESG investing criteria to prioritise certain areas isn’t on its own enough to meet the requirements for a label, and a fund must have specific sustainability objectives with measurable positive outcomes.
This is why the ‘responsible’ section of the Charles Stanley Preferred Fundlist contains funds that do not have a label. They either take a broader approach that doesn’t meet the criteria, or in the case of overseas domiciled funds they are not covered by the rules. For instance, Brown Advisory US Sustainable Growth is out of scope for a label or accompanying sustainability documents at present.
Finally, some funds may acquire a label at some point in the future if they haven’t yet completed the process of setting out their policies or putting together the required documents.
Wider responsible funds may not be suitable for investors looking primarily for investments specially designed to promote positive environmental and social outcomes. However, any such UK-domiciled product will still have documents setting out their sustainability-related policies and objectives, so investors should check fund literature carefully to ensure a fund meets their requirements before making investment decisions.
What about ethical funds?
A traditional ethical investment process differs from sustainable one. It typically applies a process to filter out businesses involved in areas deemed harmful or unethical such as oil and gas, alcohol, tobacco, gambling, weapons or animal testing.
The process typically focuses more on excluding specific areas rather than prioritising companies that are making positive contributions, or are improving over time. Although it is certainly possible to combine both philosophies and there can be overlap in the approaches taken by ethical and sustainable funds.
Ethical investment funds may not qualify for a sustainability label if they only employ a filter process, but they can often meet the needs of those wishing to invest responsibly. When choosing the best ethical funds for you, make sure you read the fund literature carefully to ensure it fits with your own views.
An example from our Preferred List is Rathbone Ethical Bond Fund, which applies a broad range of both positive and negative ESG factors as well as including charity and green bonds in the portfolio in areas such as social housing, sustainable transport and renewable power.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
How new labels can help you choose a sustainable fund
Read this next
FTSE 100 hits new record high
See more Insights