A ‘gold rush’ of new funds being marketed on the back of their ESG credentials could pave the way for a new mis-selling scandal if some providers over-hype their environmental impact.
A new paper from Capco says the potential risk of mis-selling in this environment “cannot be understated” with investors looking to go green to help tackle climate change and firms looking to enhance perceptions of their environmental credentials and products.
Capco points out that more the number of products marketed on their ESG credentials has exploded in recent years, with more than half the money — a total of €1.4 trillion — flowing into European funds in 2020 going into sustainable products.
Its paper Climate Conduct & Financial Services: Tomorrow’s Mis-selling Scandal?, cites research should 63 per cent of 550 global financial service professionals consider their products to be green friendly, while 64 per cent said their upcoming products were designed to be socially and environmentally friendly.
Capco says there is the potential that some firms may misrepresent the true underlying nature of these green products. It adds that the financial services industry needs to learn from previous scandals such as Volkswagen ‘Dieselgate’ and UK Green Deal scandals.
With regulators now moving towards legislation to make existing initiatives and frameworks binding to mitigate mis-selling risks for both firms and consumers, it says it is vital firms recognise the potential pitfalls and the harm arising from mis-selling at both the company and sector levels.
In the paper Capco says: “The complex subject of conduct in combination with climate change, presents an anxiety-inducing and risk-strewn proposition. When navigating this potential minefield, caution and process must become the focus at all levels of the firm when delivering robust and defendable frameworks to manage ESG products and services.
“Without this approach, it will be all too easy for firms to over-egg their ‘green pudding’ and as dieselgate attests, ‘where there’s blame, there’s a claim’.
“The danger of mis-selling green products and misrepresenting the positive ESG or climate credentials of a product may deliver short-term gains, but could also lead to significant value destruction in the longer run. If the lessons of previous mis-selling mishaps are learned, then this could be the defining opportunity for the next generation of financial services’ customers, firms, employees and executives. If not, it has the potential to damage not only individual firms’ balance sheets and reputations, but also broader efforts to make sustainable finance a reality – and ultimately the very future of our planet.”