Financial advisers have expressed worry over possible mis-selling of products marketed as having strong environmental, social and governance credentials as interest surges in the responsible investment sector.
Virtually all financial advisers (97 of 100) were “very” or “fairly” concerned “about the potential for allegations of mis-selling” of ESG-badged investments, said Cicero, a market researcher.
“The language in this part of the market has become dense and confusing. There is little regulation over what you label a product,” said Neville White, head of research into sustainable and responsible investment at EdenTree, the £2.8bn asset manager that sponsored the research.
Comparing the risk of ESG mis-selling with the payment protection insurance scandal in the UK, in which lenders had to repay more than £30bn to customers, he said booming interest in ethical investment was tempting some managers to relabel products to capture a slice of the market.
“We welcome the growth in interest in responsible investment but it has to be based on strong foundations,” said Mr White. “A sustainable fund should look very different to a mainstream passive tracker.”
He conceded, however, that it was hard for asset managers to assess every ethical dimension of a company given the size of global businesses and the complexity of topics such as human rights protection in supply chains.
In recent years various initiatives have emerged aimed at pushing companies to disclose information on how they address areas such as climate change and labour rights. These will help investors assess ESG credentials.
One such organisation is the Task Force on Climate-related Financial Disclosures (TCFD), which helps companies identify climate-related risks so they can pass them to investors. Another is the Corporate Human Rights Benchmark, backed by investors including Nordea and Aviva, which examines human rights performance.
Nearly a third of advisers surveyed said they wanted clearer ESG labelling. Last year Brussels said it would support a statutory European classification system to define what qualified as a sustainable investment.
Mr White said he was pleased the EU was looking at the issue but warned against “one size fits all”.
He said Brussels had focused mainly on environmental issues. “There’s very little there on social risk,” Mr White added.
The report showed that advisers were nearly in complete agreement that tobacco groups, weapons-makers and companies producing pornography have no place in an ESG fund. However only 29 per cent said mining or fossil-fuel industries should never be included.
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