Advising clients to invest in products that are later accused of greenwashing is one of the biggest concerns for financial advisers when it comes to ESG investing, according to research.
Around 69 per cent of advisers surveyed by Boring Money said they were worried about the reputational risk of recommending products whose sustainability credentials are later called into question.
One in five advisers said they were ‘very concerned’ about this risk, with a further 49 per cent saying they were ‘somewhat concerned’.
Holly Mackay, founder of Boring Money, said greenwashing concerns have overtaken investment performance concerns for advisers.
She said: “That [concern has] shifted over the last year, it’s not so much performance concerns putting advisers off now, it’s the reputational risk."
She added: “[So] what is it that [clients] want to see? It’s this transparency and reporting evidence of impact and change, and [this has been] a shift over the years from blacklisting to what people want to see today, which is much more of a story about positive impact.”
However, the report showed significant concerns over how to get this evidence. Just 33 per cent of advisers said current ESG fund communications were good enough to support the conversation they needed to have with clients.
Boring Money’s Sustainable Investing 2021 report was conducted with 4,000 adults, 1,500 retail investors who hold funds, and 200 financial advisers. The report was supported by Morningstar.
Director of client solutions at Morningstar, Anastasia Georgiou, said it was clear investors and advisers want to see evidence of both impact and returns, and concerns over greenwashing meant data and analytics were more important than ever.
She said: “We hope that Morningstar’s independent sustainability framework can be a tool for advisers to go beneath the surface, with both qualitative and quantitative screens, as they help clients find investments that meet their long-term risk and ESG considerations.”
Mackay added: "The sector needs to put more effort, resource and time into thinking about how to communicate ESG credentials to clients. Simply using the same old broken factsheet template isn’t helping anyone. Lengthy annual PDFs are a good start but are too hard to find and digest for the majority.”
Among those questioned, 63 per cent of fund investors thought sustainable funds could offer better returns than non-sustainable options.
Mackay said: “The last 12-18 months have been kind to sustainable investments for various reasons...that’s interesting again because that picture has changed radically over the last four years.”
Advisers are more cautious however, with a third of those surveyed saying sustainable options had the chance to produce better returns, and another third saying they don’t think sustainable investments will do as well in future.
Mackay added: “There is quite a dramatic difference between consumers and advisers and it's the advisers being more bearish about this.”
In July, Hortense Bioy, global director of sustainability research at Morningstar, said advisers need to manage end investors’ expectations around ESG to avoid accusations of greenwashing.