Regulators have been urged to launch a review of the ethical and sustainable fund sector, after a leading wealth manager accused the industry of misleading investors by marketing socially responsible funds that have significant exposures to defence, tobacco and gambling stocks.
The research, by SCM Direct, highlighted funds such as L&G Future World and Vanguard SRI products for have a significant weighting in these sectors, despite an emphasis on having an investment strategy that takes into account environmental, social and governance (ESG) factors.
The report highlights that there has been a boom in the number of ESG funds launched, led by investor demand for more sustainable and environmentally-conscious investment strategies.
The report says: “We are witnessing a plethora of ESG, SRI (socially responsible investing) and other ethically-based strategies being launched, both in the UK and internationally.”
But it adds: “In the rush to satisfy this growing consumer demand companies are launching products amidst a data fog, where it is difficult to see or identify what is really being held within these funds.”
The SCM Direct report says it found widespread examples of “misclassification and mis-selling”.
As well as asking for the Financial Conduct Authority to review this sector, it says there is an urgent need for more transparency among asset managers, with investors given a full list of holdings, alongside costs and details on ethical investment strategies.
Alan Miller, co founder of SCM Direct, says: “The ESG sector is akin to the Wild West, and once again the UK regulator appears to be asleep at the wheel failing to protect the public, as it did with the recent Woodford scandal.”
He adds: “Despite significant growth in this area, regulators have been slow to provide a definition or methodology of what constitutes responsible investing; leaving it to investment managers and data provider to self-identify and define.
“We believe this has led to an alarming level of what we would term ‘greenwashing’ – a practice of making misleading claims about the environmental benefits of a fund, investment or company.”
While the report is focused on the direct-to-consumer market there are clear implications for those recommending SRI and ESG investment strategies for the workplace pensions market, particularly for default strategies.
Many asset managers that have run low cost index funds — such as LGIM — say they promote active stewardship and engagement with all companies that invest in, with the aim of improving ESG considerations.
Vanguard points out that it excludes companies based on the UN Global Compact which takes into account issues around human and labour rights, environment corruption and the manufacture of controversial weapons.
The SCM Direct report says: “Ethical score and ratings vary enormously between data providers in terms of individual securities… and individual funds. For example an identical search for “socially responsible” funds utilising two different investment platforms (powered by the same data provider) produces completely contradictory results.”
It said there was a need for common data accounting standards to key data can be independently audited and signed off.