Greenwashing is likely to be a thing of the past as regulation will stamp out bad practice in the industry over the next few years, according to Aviva’s investment lead.
James Dalby told FTAdviser the Financial Conduct Authority’s focus on protecting investors from greenwashing coupled with amendments to Mifid II expected at the start of 2021 should ensure providers and advisers are “very cautious” about the way they deal with ESG investments.
Mr Dalby said: “I think we will hear lots of stories about greenwashing over the next few years.
“But my expectation is that with the help of the Investment Association being really clear about terminology, and the combination of the FCA putting the industry on notice and Mifid II amendments we will see a halt on greenwashing.”
Environmental, social and governance (ESG) investing takes into account ethical factors alongside financial markers in the decision-making process and has become more commonplace in the global investment space in recent years.
But greenwashing — a phenomenon of growing concern in the financial sector, which sees firms market products and investments to appear more sustainable and ethical than they really are — has been a thorn in the side of the responsible investment movement.
Last month (October 16) the FCA promised to challenge firms it deemed to be ‘greenwashing’ products in a move to protect consumers from being misled over the sustainability of their investments, saying it would remain an active area of focus in its "supervisory and policy work".
The watchdog also pointed to the ‘wide ranging’ use of language around this subject, but the IA recently launched industry-wide definitions on responsible and ESG investing in an attempt to create a common language for advisers, fund managers and consumers.
On top of this, amendments to Mifid II (expected to come into force in Q1 2021) will mean advisers will need to be more proactive with customers in relation to ESG considerations by asking them about their preferences.
Mr Dalby said: “The very fact that the regulator has come out and has got its eyes peeled should ensure that fund providers and advisers are very cautious.
“We welcome the regulator’s focus on this — if it can be managed away early, we will have a healthier industry. With Mifid II, advisers will start having to look at this stuff too.”
Mr Dalby’s comments come as Aviva announced today (November 25) it would move its stewardship funds, an ethical fund range the fund house launched in 1980, onto its adviser platform.
The £2.4bn range incorporates five actively managed funds — UK Equity, UK Equity Income, International Equity, Bond and Managed (a blend of International Equity and Bond) — and was made available to the adviser community due to "demand from the IFA world".
Mr Dalby said: “We’re seeing a lot of interest and demand in the adviser market for funds that fall under the ESG banner.
“There’s a lot of things to think about under ESG and advisers are going to see a lot of products and different terminology used.”
Previously advisers have been branded as “unreceptive” to ESG investments and were often blamed for the products’ slow take up in the UK retail space, but Mr Dalby did not think that was a “problem in the market”.
He said: “I think the funds will be popular. It’s almost going to be a year of education for all stakeholders around ESG things and the different strategies.
“I think the funds we’re adding are a broader base solution which I think will be taken up. We’ve seen a lot of demand in the workplace pension market and I think this is transferable.”
Tim Morris, independent financial adviser at Russell & Co Financial Advisers, thought making the Stewardship funds available on the platform was "good news".
He said: "I have a few clients on the Aviva platform so would like to see them competitively priced for this, especially with Mifid II bringing in further cost scrutiny.
"Greenwashing is a concern for me and has made me somewhat cynical when it comes to the claims of some providers.
"Unlike other supposedly 'ethical' labelled funds, Aviva's use negative screening which gives me confidence their assessment criteria is more robust than many."
The investment approach of the Stewardship funds is based on three layers: exclusion, engagement and outcome.
‘Exclusions’ are based principally on what a company does — companies with a significant involvement in tobacco, pornography, mining and other topics are excluded from the funds — while ‘engagement’ involves the fund managers working with companies to improve how they conduct their business.
The ‘outcome’ process is about measuring the ESG performance of the companies in which the funds are invested.
Steve Waygood, chief responsible investment officer at Aviva Investors, said: “Launching the funds onto the adviser platform means advisers have options that can help them remain compliant when the new regulations come in.
“But it also means that a wider range of people now have access to ethical funds, so they can tailor their investments in line with their beliefs.”
imogen.tew@ft.com
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