Investors often assess ethical strategies differently to their financial advisers, which is causing confusion in the sector, the head of responsible investment at Columbia Threadneedle Investments has claimed.
Speaking at the Columbia Threadneedle CIO breakfast on Responsible Investment last Wednesday (March 20), Ian Richards, head of responsible investments, said the nature of ethical and environmental, social and governance investing, and the lack of definition in this space, was causing a lot of confusion for financial advisers.
Ethical investing is the practice of applying ethical principles as the main deciding factor when investing. But there are a variety of strategies and exclusions defining why each particular investment is considered ethical.
Mr Richards said: "One of the biggest challenges is if a client decides they like a particular ESG strategy, then it turns out afterwards that they are assessing it using a completely different framework."
Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, agreed a lack of clarity around ethical investing has caused problems for him.
He said: "The main problem is that there is no black and white definition for what 'ethical' means, so clients usually have their own perception of what this means and how these investments work in practice."
During his time as a financial adviser at Co-op, he said he had clients asking why he was investing in a certain company despite negative press coverage of them.
"Clearly there was a misunderstanding here in terms of how the ethical criteria and mandate worked, and [clients] hadn’t realised that for example the fund’s ethical mandate enables the fund manager to actively engage in shareholder meetings to change a company’s behaviour and remove poor practice," he said.
But Julia Dreblow, founding director at SRI Services and Fund EcoMarket, looked for the blame elsewhere.
She said: "This [confusion about ethical investing] risks people thinking fund managers are ‘greenwashing’ or ‘impact washing’ when in reality it is because an adviser has not done their homework properly."
Mr Chan said advisers should complete more CPD in this area and attend ethical investing conferences to mitigate these problems.
He added: "Or simply decline to take on such clients to prevent an unhappy relationship further down the road."
Mr Richards meanwhile also highlighted the cost of ESG data as being a concern.
He said: "You look at the effect of Mifid II on research budgets. At the same time we are saying we want to introduce these massive costs. Who is going to pay for it?"
Ms Dreblow disagreed with this view.
She said: "[ESG data] is a really important area and a lot of money will be earned and lost relating to this subject over the next decade or so. It will be up to fund managers to decide the data they need and indeed what in house resources they employ."
The unbundling of research costs was a component of the Mifid II rules introduced in January 2018, which requires financial services firms to disclose a breakdown of all costs and charges associated with a client’s investments on both a forecast and actual basis.
The CFA Institute warned in February the rules have caused a "shakeout" of small and independent research providers in the investment industry.
It also stated research budgets had been scaled back in the last year, with the largest firms making the biggest reductions.
In January traders warned the impact of Mifid II may have already done permanent harm to the markets, with claims the unbundling research costs have "significantly damaged" the quality of research and market competition.
saloni.sardana@ft.com
