The industry is destined to “rinse and repeat” the issues surrounding environmental, social and governance investing unless there is a clear, collective framework.
Advisers and analysts have criticised the responsible investment sector for its confusing and conflated terminology, a lack of clarity around weightings, greenwashing fears and “woolly” responses, as warning bells are sounded that lingering issues could cause further problems.
Steve Nelson, consultant at the Lang Cat, told FTAdviser the industry was “doomed to rinse and repeat the same issues of old” until it collectively improved understanding on what ESG “actually means on a practical and individual level”.
He said: “The sector has gone to ‘solution mode’ without fully understanding the problem and without fully engaging with the people that matter – that’s customers, or advisers on the hook for sourcing and recommending investment ranges.
“I don’t envy the thousands of high-quality planners facing the umpteenth round of regulatory change with so little clarity and consensus on this seemingly increasingly important issue.”
Advisers admitted they were facing an uphill battle when it came to working within the existing ESG frameworks.
Ricky Chan, director at IFS Wealth & Pensions, said: “The usage of terms such as ESG, ethical and sustainable are quite often used synonymously, despite attempts at a framework from the Investment Association.
“Within ESG specifically, who determines the weighting or importance placed on each of the factors? And furthermore, the subfactors within these could encompass a lot more considerations and questions.”
Mr Chan added that greenwashing – making an investment seem ‘greener’ than it is – was a growing issue as investment fund houses attempted to “capture some of the profits”.
Tim Morris, IFA at Russell & Co Financial Advisers, agreed. He had “lost count” of the number of fund managers who claimed that ESG formed part of their process, but when questioned were only able to provide “woolly answers that skirt around the issue”.
ESG investing has boomed in popularity as more investors consider the impact of their money.
Good Money Week, which takes place next week (October 24-30), is a national campaign promoting sustainable and ethical options for banking, pensions, savings and investments, with the tagline: “Money that’s good for people, the planet and our pockets.”
According to data from Morningstar, investors pumped more than £10bn into UK-based ESG funds in the first eight months of 2020 – already beating last year’s £8.9bn total.
And fund managers have been quick to respond to the ongoing trend with numerous fund launches, with 25 new ESG funds launched in 2019 compared to 2016’s four.
The trend is likely to continue to grow as EU regulations, set to come into force in early 2021, will require advisers to ask about clients’ ESG preferences.
Gemma Woodward, director of responsible investment at Quilter Cheviot, said: “The likes of David Attenborough and Greta Thunberg can take a lot of credit for awakening the public conscience, which has no doubt been cemented by terrible bushfires in Australia at the start of the year and ongoing forest fires in the US.”