New regulatory rules around investment suitability are deterring advisers from recommending social investments, which is impacting on growth in this sector, research from the Social Investment Research Council has found.
The research into marketing social investments, commissioned by the City of London Corporation, revealed that advisers regard social investments as “riskier” than mainstream commercial products.
Liquid investments tend to be the main choice for advisers, suggested, and advisers are wary of investments that have a “lack of a track record” in the market.
While the Financial Promotion Regime, the legislative and regulatory regime applying to financial promotions, provides “valuable and necessary regulatory protection to retail investors, there is scope for the regulatory landscape to be improved and clarified, to enable the growth of the social investment market”, the report says.
Due to the greater regulatory risk, the report found that financial advisers are acting as a “barrier” between social investment opportunities and clients.
The report said: “This reluctance can arguably be linked to uncertainty among advisers as to the application of their obligation to clients – to assess their client’s suitability for an investment opportunity and provide advice on their investment decision accordingly.”
Unless clients ask for specifically ethical options, advisers would always recommend mainstream commercial investments, according to the research.
The report said: “For the small minority of investors who might have access to a financial adviser - which itself is a challenge due to associated costs - advisers are reluctant to recommend social investment to their clients due to perceived regulatory risks
“While there is a general lack of data on retail investors, there is evidence to suggest that they are a potentially important ‘untapped’ pool of capital for the social investment market to draw upon.
“The data therefore suggests that there is both an appetite for social investment among retail investors, and a sufficient number of retail investors to be of interest to social enterprises seeking investment capital.”
However, global investment manager Standard Life Investments has seen its UK Ethical Fund grow in size almost four-fold over the last 10 years, returning 149.3 per cent to investors versus the UK All Companies sector average of 129 per cent and its ethical sub-sector average of 120.2 per cent.
Lesley Duncan, manager of Standard Life Investments UK Ethical Fund, said: “Our research shows that the ethical criteria that remain important to our investors have been consistent over the years with areas like – weapons, tobacco, human rights and environmental issues high on the radar.
“Our most recent ethical investor survey also indicates that investors believe that board level committees should exist to oversee environmental, social and health and safety matters and reveals very high interest lending as being a new area our investors are concerned about.”
