Advisers fear mis-selling allegations from ESG investors

Potential ‘greenwashing’ unsettles professional investors

Most people in the industry believe there is a problem with firms re-labelling or re-marketing funds as being environmental, social and governance-focused when they are not, according to the head of responsible investing at KBI Global Investors.

These comments were in response to an ESG report from EdenTree Investment Management, which surveyed 100 independent and restricted financial advisers.

It found that 97% of the advisers surveyed were either “very concerned” or “fairly concerned” about the potential for mis-selling allegations, where a client becomes aggrieved their money is invested in a firm or fund they deem unethical, despite being labelled as an ESG investment.

It also showed that 31% want “clearer, more consistent, and transparent product labelling”.

Slim evidence but strong suspicion

Eoin Fahy, head of responsible investing at KBI Global Investors, told International Adviser: “The relabelling or marketing of funds as being ESG in some way when they are not, I think most people in the industry would believe that there is a problem with that.

“But I think that trying to find very concrete examples would be difficult. I think it is something that many of us who feel strongly and care about ESG believe is going on, but I find it difficult to produce for you examples number one, two or three.

“I think it is more in the area of well-founded suspicion than proof it is going on.

“I am not surprised that advisers are concerned about a degree of ‘greenwashing’, that a number of investment managers are jumping on the bandwagon and re-labelling existing strategies to appear as if they are ESG.

“The concern is welcomed as a first step,” Fahy said.

Tobacco, weapons and porn

While ethics is often considered very subjective, the report showed advisers are almost unanimously in agreement that, regardless of any ESG score a company may receive, an ESG fund should never include companies from the tobacco industry (94%), weapons manufacturing industry (93%) or pornography (91%).

Fahy added: “Anybody that is concerned about ‘greenwashing’ should be able to check a fund, or what they are considering or recommending an investment in, with some sort of transparency label.

“I am not sure about the practicalities of giving lots and lots of information about every company you invest in, as funds invest in around 200-300 different stocks.”

He said there would be little point in “putting a paragraph or two about the ESG performance of each company on your website”.

“It is more important that an investment firm or fund lists how they take ESG more seriously, what they take into account and why, the types of companies they invest in and what they don’t invest in.”

Defining ESG

Fahy was asked about whether there should be more done about the screening of companies used within portfolios.

“If you start putting down strict regulatory definitions of what is or is not ESG investing, you are now talking about committees and regulators coming up with definitions. But markets and technology changes and so things move on.

“If regulators sat in a room 10 years ago about this topic they wouldn’t have been talking about issues like climate change or alternative energy. It might have been all about not investing in things like tobacco. Now climate change has become such an important part of the world.

“I can see the other side of the argument, however, that you perhaps need some sort of mechanism to stop people claiming to be something that are not. I think the ultimate safeguard is transparency and that people must publish the details of the investments.”

But for Fayy, “transparency is the answer to the greenwashing problem, rather than strict regulation”.

IA consultation

The Investment Association is looking to introduce an ESG label for retail investors following criticism of the European Commission equivalent for being overly focused on the environment.

The UK funds body on 25 January launched its consultation into sustainability and responsible investment.

It is seeking feedback from the industry on UK product labels for retail investors and their advisers and whether these should be optional or mandatory.

The European Commission published its draft Sustainable Finance Action Plan proposals in March 2018. However, several submissions on the proposals raised concerns the recommendations by the high-level action group were too focused on environmental sustainability at the expense of social and governance factors.

The IA called for the Commission to spell out its focus on the environment or risk narrowing the definition of ESG, arguing retail investors could get misled into thinking a product took a holistic approach to responsible investing when it actually had a much greener focus.

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