Investors are being left confused by ill-defined labels for ethical financial products, which could leave some horrified by the companies and industries they are unknowingly backing, new Which? research reveals.
There are many labels for investments that consider more than just profits, but Which? research suggests there is often a mismatch between what investors understand to be “ethical” and the fund management industry’s definitions.
Some within the industry have gone as far as suggesting that dubious claims about some ethical investments amount to “greenwashing” and that the FCA should crack down on companies that produce misleading marketing materials.
A new Which? survey found very few people could pick the correct definition of ethical investing – as defined by fund managers – despite 37 per cent of respondents answering that they held these types of funds.
Just 10 per cent of investors were able to accurately define it, meaning they were only marginally more successful than non-investors (6%).
The research also identified that confusion over other terms used in the industry to describe the ethical credentials of investments was rife.
Even the best known – Environmental, Social and Governance (ESG) – was only correctly defined by three in 10 (31%) investors and just one in six (16%) non-investors.
When asked to rate their own understanding, a third (34%) had never heard of Sustainable and Responsible Investment (SRI), which denotes a wide range of investment strategies that focus on ethical, social and environmental issues. Four in 10 (42%) had never heard of impact investing, and nearly half (45%) had never heard of dark/light green investing.
To make matters more difficult for consumers, these labels are unregulated and left open to interpretation by firms, blurring what should be important distinctions for investors about the ways that funds pick investments.
For example, a traditional ethical fund, with a focus on climate change, might exclude an energy and petrochemical company for its involvement in fossil fuels – a process known as negative screening. A fund with a ‘light green’ label might embrace an oil company, because of its extensive wind power and solar businesses (known as positive screening).
An ESG fund might include an oil company because it considers its management to have properly prepared for the dangers posed by climate change – despite the industry’s contribution to that change.
With those significant differences, it’s clear that it could be all too easy for a consumer unsure on what the various different labels mean to end up investing in something they are uncomfortable with, despite consciously making an effort to do the opposite.
This is of particular concern for companies noted for their association with certain issues. Climate change was the top ethical concern for investors surveyed by Which?, with 27 per cent considering it when investing – above other concerns including weapons, tobacco and workers rights.
As a result, Which? is calling on the investment industry to set the definitions of ethical labels so that regular retail investors have the information and confidence they need to pick investments, and believes that these should be regulated by the Financial Conduct Authority.
It is a view shared by the public. In the Which? survey, nearly half (47%) agreed that common definitions should be introduced, and half (50%) backed regulation.
Meanwhile, fewer than one in ten (6%) respondents disagreed with regulation, and just seven per cent disagreed with common definitions.
Jenny Ross, Which? Money editor, said:
“With such a bewildering array of products and confusing labels for investments claiming to be ethical it’s no surprise that concerns have been raised about greenwashing in the industry.
“It’s time for the industry to clean house. It should establish unambiguous definitions for ethical investments and these should be regulated by the FCA so that consumers have the information they need to avoid investing in causes they are opposed to.”
Notes to editors:
- Which? surveyed 2,002 UK adults between 1st and 4th May 2020. Fieldwork was carried out online by Opinium and data has been weighted to be representative of the GB/UK population (aged 18+).
- Both investors and non-investors were asked what issues they would consider when investing. They were allowed to select multiple issues, but top of the list was climate change (27%), then workers rights (21%), tobacco, gambling and arms (20% each) and gender equality (14%). The remainder (43%) didn’t consider any issues.