July 31 arrived and consumer duty became a reality, with phrases such as opportunity cost, cross-cutting and sludging (my favourite) to add to the lexicon.
And then, within days, I receive an update from a compliance firm. Amongst the various items was one striking nugget: "How do you evidence that greenwashing is being addressed within funds/portfolios that you recommend to your clients?"
For me that is achievable as we have a sister company employing 15 people carrying out research into global companies and funds, so if we wonder about a fund or a holding, we can ask.
It is fair to say that this is an unusual profile, and the challenge presented to IFAs is significant.
As a first step it might be instructive to understand what is considered greenwashing in this context, as this is of very current interest to the Financial Conduct Authority with their labelling consultation ongoing.
In an online article in January 2023 on the subject, it was stated that the labels are aimed at firms that "make exaggerated or misleading claims about the environmental credentials of their investment products".
Greenwashing is a major issue for the FCA as it undermines trust in the whole financial ecosystem.The irony is that this is arguably misleading in itself as the FCA in November 2022 defined it thus: "Greenwashing misleads consumers and erodes trust in all ESG products." So to be clear, it does not solely apply to environmental issues, but across social and governance areas as well.
Greenwashing is a major issue for the FCA as it undermines trust in the whole financial ecosystem, and as all advisers will know, trust is the essential component of any client relationship.
Greenwashing is also seldom accidental, although at the same time it can be unintended. If there is a lack of understanding, either of the expectation of the investor or of the data being used to underpin the greenwash, that is a pretty significant failing by the asset manager and their research methodology.
If, however, it arises due to an excess of fluff from a marketing department desperate to have a product to fit into a market where they have no presence, that is hardly accidental.
When an adviser decides that they wish to work in the ESG/sustainable space, and that they are obviously seeking to avoid greenwashing, the first thing to consider is how to access the market.
It is most likely that this will be done through one of two routes; firstly, by selecting individual funds that are suitable for the client to match all of the usual requirements plus the extra sustainability linked issues.
The second is to outsource this function to an external manager, and either via an MPS or a discretionary portfolio, to instruct them to construct a portfolio.
At this point, having decided the style of access, the next question is key; trust is vital, so how does an adviser reassure themself that their trust is justified?
And answering the question raised at the very beginning, how does the adviser evidence and record that?
If the sustainable MPS option is being used the responsibility to avoid greenwashing lies with the DFM running the strategy.
The key questions that they need to answer are: how do you avoid greenwashing; do you check each holding in every fund that is held within the MPS; and do you apply double materiality when assessing funds and holdings?
It would also be a good idea to investigate how they classify greenwashing and the questions they ask of funds that they hold to minimise the likelihood of it arising.
If selecting fund holdings in a portfolio constructed by the adviser is the choice, it is not practical for the adviser to check every holding in every fund.
As the adviser is effectively creating their own MPS, they should ask themselves, and the funds that they select and hold, the same questions as they would a DFM managing a sustainable MPS.
All of these discussions and conversations need to be recorded and also carried out with regularity, thereby reinforcing that the adviser is minimising the likelihood of greenwashing arising for their clients.
And as a final, inevitably unpopular consideration, don’t become a greenwasher yourself.
If your knowledge and understanding of sustainable investing is patchy at best, either address that issue or don’t pretend.
The FCA is looking closely at inadvertent and competence greenwashing. Advisers should be very careful to make sure that they do not lack sufficient knowledge and understanding of a complex topic, and thereby fall foul of the second issue.
Mike Head is a director at advice firm Ethical Investors and managing director of research firm Ethical Screening
