Fears rise around mis-selling of ESG products

There are growing concerns environmental, social, and governance (ESG) products are being mis-sold to investors, according to a report by research house Cicero.

The report found 97 of the 100 independent and restricted financial advisers surveyed said they were either "very concerned" or "fairly concerned" about the potential for ESG products to be mis-sold to them.

Furthermore, 31 per cent of respondents said they wanted "clearer, more consistent, and transparent product labelling", highlighting the need for ESG providers to show what is under the bonnet of their funds.

Commenting on the report, Neville White, head of responsible investment policy and research at EdenTree Investment Management, said there is a "strong risk" of product mis-selling due to the lack of information from providers around the nature of business activity, the ethical profile of businesses within funds and specific ESG ratings included within the funds.

"The high level of concern among advisers for potential mis-selling is deeply concerning for our industry," White added. "What is clear from the report is that advisers typically agree with their clients' approach to ESG investments from an ethical standpoint.

"These clients would be troubled if their money was placed in a fund they subsequently felt did not live up to the claim of being 'ethical'."

The report also found an almost unanimous agreement that ESG funds should not include certain sectors such as the tobacco industry, which 94 per cent of respondents said should be excluded, while 93 per cent named the weapons manufacturing industry and 91 per cent do not want to see pornography-related stocks in their funds.

White said one way to tackle the potential for mis-selling was through greater control around terminology.

"We have a situation where fund managers, with little long-term expertise in sustainability or responsibility, may be opportunistically viewing a 'hot space' as an easy entry point to a new market," he said.

"This has created a wave of launches and the re-labelling of funds. To avoid this greenwashing, we need processes with attached integrity.

"This means testing providers to ensure they know what they are offering and can articulate their strategies to advisers and investors."

In October 2017, a Castlefield report found ESG strategies from Aberdeen Standard Investments, Schroders and Vanguard were failing to stick to their ethical criteria.

This article first appeared at Investment Week