This article by Cameron Gilchrist, Lucy Hayes, Cherryl Ng, Patrick Sholl and Jackie Spang at the FCA reports findings from a new set of randomised controlled trials and qualitative research on sustainability disclosures for investment products.
In research just published, we find behaviourally informed sustainability factsheets improve consumer comprehension of important sustainability information, over and above providing only key investor information documents (KIIDs). Factsheet length (two and a half pages compared to one page) appeared not to have an impact on comprehension. However, where we provided factsheets for sustainable products only, comprehension was lower than where we provided them for all products.
Although sustainable factsheets increased comprehension, qualitative research found that some consumers often remain unfamiliar with important concepts such as ‘stewardship’, as well as the fact that there are different approaches to investing sustainably. Whilst not an explicit aim of our research, we found that the provision of sustainability factsheets increased the proportion of participants who made a hypothetical choice to invest in a sustainable product. Further analysis suggests that the increase in comprehension was an important reason for this change.
The growth of sustainabile investing
Today, many of us would like our money to be invested in a way that does some good as well as providing a financial return. In fact, around eight in ten of us with investments feel this way, according to the FCA’s 2020 Financial Lives Survey. Firms are responding to this demand, and there are now more than 1,000 funds with responsible, sustainable or ethical characteristics available in the UK according to Fund EcoMarket, a fund comparison site. This is an increase of around a third since the FCA published a Discussion Paper on fund labelling and disclosure in November 2021, following the publication of the Government's Greening Finance: A Roadmap to Sustainable Investing.
Increased choice is often a very good thing in financial services. However, increased choice in sustainable investments has come with increased complexity such as on standards, terminology, classification and labelling. Increased complexity, as we know from across financial services, can make it difficult for us all to choose products that meet our needs. On top of this, the FCA has highlighted evidence of firms making exaggerated, misleading or unsubstantiated sustainability-related claims about their investment products. This phenomenon, so called ‘greenwashing’, is a problem that has been testing regulators across a range of industries both in the UK and globally. There is emerging evidence that consumers are liable to believe greenwashed claims.
Without intervention to set a high bar for sustainable investment claims and clamp down on greenwashing, the concern is that consumers will find it difficult to build trust in and navigate the market for sustainable investments. This would be bad for consumer outcomes, for the sustainable investment market in the UK and for achieving a net-zero economy, which the FCA must now consider when advancing its objectives.
To address such concerns the FCA, in its proposed rules, has set out a sustainability labelling and classification system for investment products, along with disclosure requirements for asset managers and investment products. In order to help inform these proposals, and to help consumers better understand sustainability disclosures for investment products, we carried out a programme of behavioural research.
Getting our facts straight
When sustainability information is provided for an investment product, it can be buried in the Key Investor Information Document (KIID), a two-page factsheet with key information (for example, past performance and fees) about a fund. Consumers may not access or understand information in this context because of limited attention and excessive costs associated with searching for and understanding information.
We tested whether we could increase consumer comprehension of a fund’s sustainability characteristics by providing this information in a separate sustainability factsheet, available alongside the KIID. We drew on principles from behavioural science research to inform factsheet design. For example, we added section headers to the factsheet and used icons and graphics to portray metrics. This is sometimes called ‘priming’ and has been shown to be effective in capturing consumer attention and helping consumers understand investment disclosures. Further, we provided context for important sustainability metrics, and used colour-coding to indicate better or worse values (see Figure 1). A range of these measures have been shown to be effective in helping consumers to understand and compare between nutrition labels. In addition, we expressed percentages as whole numbers of £-values (see Figure 1) where possible (eg. ’70 out of every 100 companies…’ or ‘£67 out of every £100…’) which has been shown to be effective in a range of contexts. As well as these sustainability metrics shown in Figure 1, the factsheets also included elements such as the product label and description, the sustainability goal and progress towards that sustainability goal. An example of this is shown in Figure 2.
Figure 1. Extracts from the hypothetical sustainability factsheets used in our experiments. This shows how we used context and colour coding (relative carbon footprint) and displayed percentages in whole numbers (product sustainability).
Figure 2. Extract from the hypothetical sustainability factsheets used in our experiments. This shows the sustainable label and description and the sustainability goal and progress for a ’Sustainable Focus’ fund.
Sustainable factsheets, short or long?
Drawing on insights set out above, our first experiment tested two different versions of the sustainability factsheets against the current status quo of providing sustainability information within a KIID. The two different versions of the factsheet were a longer (2.5 pages) sustainability factsheet and a one-page sustainability factsheet. They differed in terms of the amount of sustainability information presented but both contained enough information to answer our comprehension questions, as did the KIID. We hypothesised that we may see information overload effects with the longer factsheet, leading to reduced comprehension. However, given the complexity of information, we also wanted to know if consumers experienced greater gains in comprehension with the additional information and explanation that the longer template afforded.
We recruited a sample of several thousand participants from the UK, many with investment experience. For each participant, we tested their knowledge across the five different product categories set out in the FCA's Discussion Paper: ‘Not Promoted as Sustainable’, ‘Responsible’, ‘Transitioning’, ‘Aligned’ and ‘Impact’.
We found that the factsheets improved comprehension of the sustainability characteristics of investment products, compared to just having the KIID available, by nine percentage points (with an average proportion of correctly answered comprehension questions out of twenty-five moving from a baseline of thirty-nine percent to forty-eight percent). We found no difference in overall comprehension between the longer sustainability factsheet and the one-page sustainability factsheet. The results are shown in Figure 3.
Figure 3. Proportion of correctly answered sustainability comprehension questions (experiment 1, sample size: 7,856)
- The p-value (p) is a measure of statistical significance, where values larger than 0.05 are considered not to be statistically significant: ***p<0.001, **p<0.01, *p<0.05
- The 95% confidence interval is displayed at the top of the bars representing our treatments
Learning from experiment 1, qualitative research and policy changes
Following from Experiment 1 there were some results we wanted to explore further. For example, we found that many participants do not separate between a fund having ‘sustainable goals’ – eg, targeting a particular sustainability profile for its assets – and a fund seeking to make a ‘real world impact’. Whilst the ‘Transitioning’, ‘Aligned’ and ‘Impact’ labelled products had sustainable goals, only the ‘Impact’ product was committing to pursue a real-world impact. Participants would often answer that all three of these funds were seeking to make a real-world impact.
To understand how we could improve the factsheets to better clarify and distinguish between fund objectives, we conducted focus group interviews with consumers with a range of investing experience. The aim of the focus groups was to inform possible options for improved factsheet design. Based on the findings, we made some updates to the factsheets. For example, consumers reported that they were confused by factsheets which prominently displayed descriptions of all fund categories on the same factsheet. Therefore, we amended the factsheets to only include a description of the fund category relevant to the particular fund in question. In addition, we also reframed key terms in a consumer-friendly way. For example, in the qualitative research, few consumers understood the concept of stewardship and how it could lead to sustainable benefits. Therefore, stewardship was reframed as ‘engaging with companies’.
In line with policy development, we also made changes to the number and names of fund categories in the factsheets, to: ‘No Sustainable Label’, ‘Sustainable Improvers’, ‘Sustainable Focus’ and ‘Sustainable Impact’ In addition, we made a change to the ‘No Sustainable Label’ fund factsheet. In Experiment 1, the sustainability factsheet for products without sustainable goals was similar to those with sustainable goals. By the start of Experiment 2, there was a policy question as to whether to provide a slimmed down version of the sustainability factsheet for products without sustainable goals or not provide a factsheet at all. So, we specifically tested consumer comprehension under both conditions.
To test whether the factsheets remained effective after these changes, we conducted a second experiment. We decided to proceed with only testing the one-page factsheet as opposed to the longer factsheet, as they were equally effective in increasing comprehension in Experiment 1.
Sustainable factsheets, for sustainable funds or all funds?
As with Experiment 1, we found that the redesigned factsheet significantly improved comprehension compared to just having the KIID. We also found providing a factsheet for all funds was more effective than providing a factsheet only for sustainable labelled funds, increasing comprehension by ten percentage points (with an average proportion of correctly answered comprehension questions out of twenty moving from a baseline of forty-seven percent to fifty-seven percent). When the updated factsheets were provided for sustainable labelled funds only, consumer comprehension improved by six percentage points - a significantly smaller increase than when sustainable factsheets were provided for all funds. The results are shown in Figure 4.
In addition to the findings on comprehension, we found that the provision of sustainability factsheets increased the proportion of participants who made a hypothetical choice to invest in a sustainable product. This was in line with findings from Experiment 1. Whilst influencing choice was not an explicit aim of the factsheets, further analysis indicated that the increase in comprehension was an important reason for some of the change in choice.
Figure 4. Proportion of correctly answered sustainability comprehension questions (experiment 1, sample size: 6,744)
Overall, our experiments show that behaviourally informed sustainability factsheets can improve consumer comprehension of important sustainability information. Factsheet length (two and a half pages compared to one page) appeared to have no impact on comprehension. However, providing factsheets for all funds, as opposed to just sustainable funds, did significantly increase overall comprehension. Overall, this suggests that behaviourally informed sustainability factsheets, especially when provided for all funds, can help consumers better navigate the sustainable investment landscape.
It’s important to note that, the findings from our research were based on a specific format of sustainability factsheet. This factsheet presented consistent and standardised information across products and incorporated a range of consumer-friendly design features such as: priming, context, colour-coding and plain numbers. The success of these factsheets in increasing comprehension suggests that there is merit in an ongoing effort by firms to develop sustainability factsheets that are both consistent and consumer friendly. Similarly, some elements of the factsheets were still not widely understood by Experiment 2 even after our changes, including the distinguishing features of the ‘Sustainable Impact’ fund. Ongoing efforts would be worthwhile to help consumers fully understand the proposed sustainability terminology.
Lastly, we know that effective improvements in comprehension in the experiment relied on participants opening and reading the factsheets. In our experiment, the sustainability factsheets were always provided alongside the KIID, one click away from the product’s name. This suggests that consideration should be given to making it easy for consumers to find and open sustainability factsheets when they are considering their investments.
Results from this work informed the FCA's Consultation Paper (22/20). Interim presentations of this work were also made to the Disclosures and Labels Advisory Group (DLAG), an expert advisory group that was established to provide independent advice to the FCA on the development and implementation of the new sustainability-related financial disclosure requirements and the sustainable classification and labelling system for investment products.
In February 2020, eight in ten (80%) UK adults who had any retail investments, or had a DC pension in accumulation, or had decumulated a DC pension since pension freedoms agreed they would like the way their money is invested to do some good as well as provide them with a financial return. In May 2022, the same question was asked but referred to the last four years rather than since pension freedoms, the result was 81%. The sources for this are: Financial Lives 2020 and 2022 surveys question P_ESG5a. Unweighted base 1,119 (2020) and 2,838 (2022), in both cases excluding ‘don’t know’ responses (4%).