By Fiona Nicholson
Environmental, social and governance (ESG) investing took the advice world by storm a couple of years ago.
But the investment strategy came too quickly on the scene – and now the industry is starting to face the consequences.
A recent survey by Saltus found that scepticism and mistrust are preventing high net worth individuals (HNWIs) from investing in green and social impact funds.
The survey revealed that 44% of HNWIs invest in ESG and 80% see climate change as a priority. But it also showed that greenwashing is a key concern. The number of respondents citing this as the reason why they don’t invest in ESG was up from 15% last year to 23% this year.
Furthermore, the number of respondents who said they think sustainable investing is “just hype” was up from 20% in 2022 to 26% this year and those stating that they do not believe ESG investments are “truly environmentally friendly” was up by 10% on last year, from 15% to 25%.
Other research that also indicates greenwashing may be a problem for the financial advice sector was Boring Money’s survey which found that as many as three quarters of financial advisers were worried about greenwashing when selecting sustainable products.
The Association of Investment Companies (AIC) research last October also reflected a lack of faith in funds’ sustainability claims too. Out of 200 intermediaries, it found that only 1% said they “completely trust” them.
Industry thoughts
In October last year, the Financial Conduct Authority (FCA) announced a clampdown on greenwashing, proposing a package of new measures, including investment product sustainability labels and restrictions on how terms such as ESG, green or sustainable can be used.
Sacha Sadan, the FCA’s director of environment, social and governance, said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are.”
The regulator said that it plans to publish the final rules to combat greenwashing by the end of the first half of this year.
International Adviser spoke with a number of firms in the advice industry to find out whether greenwashing is a problem for the sector.
Richard Gillham, financial planner at Progeny, said: “The extent of greenwashing in the advice market is difficult to quantify, although there is no doubt that it continues to be a significant impediment to UK investors wanting to switch to bona fide green products.
“The dramatic increase over the last five years in ESG and sustainable investment products, in response to exponential demand and a significant push from regulators and governments, is part of the problem. It has led to ‘unintentional’ greenwashing by those advice firms who simply do not have the resources to investigate in depth the legitimacy of fund management claims and filter available ESG funds. There are other ‘facilitators’ in this, such as insurers, financiers and marketing agencies, who are in a similar position to advisers.”
Lawsons Network investment committee added: “Greenwashing became a significant problem during the initial boom in the ESG industry. Back then, ESG was not the universal term it is today, fragmented as it was between ethical, environmental and social and corporate governance. With few standardised definitions, it was difficult to sieve through ESG funds to uncover evidence of misleading or exaggerated social, environmental of ethical claims.”
John Westwood, group chairman of Blacktower, said: “As ESG becomes increasingly popular among investors, so are instances of greenwashing. Unfortunately, consumers are far more likely to be deceived by the classic greenwashing techniques employed by some businesses, such as eco language, eco imagery, and exaggerated claims without sufficient evidence. It is without doubt an issue, but as this problem grows, more is also being done to address it.”
Time and screening tools
Advisers already have a tough enough job with regulation without having to sieve through ESG funds to know if they are actually ESG.
They can use ESG portfolio screening tools – but are they actually helpful?
Charlie Buxton, head of investment management at The Fry Group, said: “Being clear on what is ‘actually ESG’ can differ from firm to firm – there is no one set standard in this space. The number of funds that have now added ‘sustainability’ into their names has also grown, with the fund often remaining almost entirely identical to how it was before and this can add confusion.
“The various screening tools – and a lack of consistency in output – can be challenging, and a company excluded by one ESG fund can often appear in the ESG fund of another (competitor), depending on what criteria it has been measured by ie ‘E’, ‘S’ or ‘G’.
“Various means of screening for funds, including negative, positive and norms-based screening, a sub-category of negative screening which excludes companies or government debt on account of any failure by the issuer to meet internationally accepted ‘norms’ such as those issued by the Organization for Economic Co-operation and Development.
“This can be a useful tool for initially filtering out companies who don’t meet certain criteria, such as, for example those whose activities involve alcohol, tobacco, gambling etc – often a materiality threshold based on revenue exposure is used to screen out these companies.
“The question of whether it works should not be dependent solely on quantitative analysis, but also gauged by active engagement with these individual companies and a rigorous assessment of the direction that they are headed with regard to these certain criteria. Relying on back-tested data only tells you so much, engagement provides a clearer sense of direction and, potentially, more relevant and timely data.”
Madeleine Ingram, director at Calculus Capital, added: “It is crucial that advisers and investors understand how asset managers are incorporating ESG into their portfolio management. Transparency is essential, and managers should be upfront about their ESG policies and how these policies have influenced their portfolio selections. On the other side of this, advisers should not hesitate to inquire about a manager’s understanding and interpretation of ESG.
“Portfolio screening can be an efficient and effective way of monitoring a fund’s ESG credentials, but it is important to understand the criteria being used to rate the portfolio companies. This is not just a concern for advisers, but for the entire financial services industry. Increased scrutiny and regulation aims to ultimately benefit consumers.”
Future hopes
The ESG investment market is not going to go away any time soon.
In fact, it will probably go more mainstream as the great wealth transfer continues – therefore the industry needs to quickly get set up for the continued rise of ESG.
Shelley Greenwood, head of investment proposition for wealth at Canada Life, said: “ESG investing is still relatively new to the mainstream, so it makes sense that there is less opportunity for education at present.
“Having said that, there are now a number of qualifications available for advisers to take if they wish to formalise their knowledge. ESG is also a very regular topic for asset managers’ thought leadership, and a recurring subject at industry conferences.
“So, while there is room for improvement, advisers are able to educate themselves to the level that is appropriate for their clients and their business.
“The most important thing is that advisers can feel comfortable both having conversations with their clients about what is important to them in the ESG space and setting realistic expectations of how their ESG aspirations could, and indeed may not be able to be met.
“It is our hope at Canada Life that SDR will support us and our financial adviser clients on the journey to establish consistent definitions and outcomes for individual funds. However, in order to make meaningful progress, the entire industry needs to start talking in the same language, in a way that customers can understand.”
This story originally appeared on our sister title, International Adviser.
