Confusing terminology used in environmental, social and governance investing can cause advisers to have “unproductive conversations” with their clients, the CFA Institute has warned.
The global investments body has sounded alarm bells that “inconsistency and variation” in ESG-related terms have led to “confusion and misunderstanding” among investors which could, over time, lead to “erosion of trust in the industry”.
It added: “The confusion surrounding ESG terminology, methods and ESG-related features can lead to unproductive conversations between investors and their advisers, resulting in client dissatisfaction with the buying process and missed opportunities to meet clients’ needs.”
The comments were made in a 42-page consultation paper, launched yesterday (August 19), which proposed a voluntary, global ‘standard’ for disclosure in ESG investment products.
Currently in the early stages of development, the CFA Institute is now calling for industry volunteers to support the standard’s next phase, with plans to release the initial version in May 2021.
Through the standard, the CFA Institute is primarily focusing on making sure investors and advisers can match an investors’ ESG needs with an ESG product.
It hopes to establish “fundamental requirements and disclosure requirements”, create procedures for independent examination of disclosures and a classification of ESG features against ESG needs.
But the CFA Institute was clear its standard would not define “best practice” for any particular strategy or approach, or provide a label or rating for investment products.
In the consultation paper, the CFA Institute pledged the standard would serve as a “useful communication tool” for advisers to educate clients about ESG-related needs and products, as well as provide “enhanced efficiency” in advisers’ product searches and due diligence.
Margaret Franklin, president of the CFA Institute, said: “Setting global industry standards to ensure transparency and safeguard trust is integral to our mission.
“In the face of growing interest in ESG investing, we found widespread support from the investment community for the development of a standard to reduce confusion and facilitate better alignment of investor objectives with product intent.”
Ms Franklin said the standard would focus on allowing investors and clients to “comprehensively evaluate” whether an investment product will meet their needs.
She added: “It is distinctly different from other standards that seek to establish disclosure requirements for corporate issuers, prescribe requirements for the labelling or rating of securities or investment products, or define best practice for a particular strategy or approach.”
ESG investing has boomed in popularity over recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.
Morningstar’s latest report showed assets held in ESG funds worldwide hit a record £810tn in June this year as investors pumped £54bn into sustainable products in Q2 alone.
But experts have previously warned the complex nature of a client’s ESG choices, the sometimes contradictory and flawed rating systems and fears of ‘greenwashing’ have created a confusing and challenging maze for advisers.