What is forbidden? People want clear disclosure about which sectors are audited when they put money into green investments

  • According to industry body AIC, people want to disclose “accurate and factual” information
  • Exclusions, inclusions, expert ratings, and impact metrics are preferred
  • Support for UN goals and principles and ESG team size are at the bottom of the list
  • City regulators have just unveiled plans to tackle ‘greenfishing’

New research shows that people most want to know what will happen when they risk their money in green investments.

The list of excluded and included sectors is rated as the most useful information by private investors, followed by expert fund ratings and environmental and social impact indicators.

According to the Investment Companies Association, which published its findings as City regulators unveiled plans to tackle “greenwashing” in the financial industry, people want to disclose “accurate and factual” information.

Negative and positive screening: Investors want to know which sectors and types of companies ESG funds will favor

The Financial Conduct Authority today proposed tougher restrictions on how terms such as ‘ESG’ – which stands for environment, social and governance – ‘green’ and ‘sustainable’ can be used.

“There is an increase in the number of investment products being marketed as ‘economical’ or making broader sustainability claims,” ​​says an observer.

“Exaggerated, misleading or unsubstantiated claims about ESG credentials undermine credibility in these products. The FCA wants to make sure that consumers and firms can trust that products have the sustainability characteristics they claim.”

An AIC investor survey found that when people analyze green investments, they see support for the UN’s goals and principles as one of the least useful pieces of information, while the number of ESG fund teams came in lower.

The industry body also conducted more in-depth interviews with some investors who found a strong preference for greater consistency and independent expertise when comparing environmental funds against each other.

How useful are labels for green investments?

The AIC’s findings included the following:

– About 55 percent of private investors agreed with the statement “I think exclusion is not a solution and it is always better to interact with companies and try to influence them.”

– But 33 percent agreed that “I think there are certain industries/activities that should just be excluded from funds that have an ESG/sustainability objective,” while 12 percent disagreed with either statement.

– People are more skeptical and pessimistic about ESG investing than a year ago – likely reflecting relatively weak fund performance in the first half of 2022 – with 60 percent taking such concerns into account, up from 65 percent in 2021.

– Among those who do not consider ESG issues when investing, 55 percent were not convinced by fund managers’ claims, compared to 27 percent last year.

– Overall, 58 percent of investors do not trust ESG fund claims, compared to 48 percent last year.

– When it comes to breaking down the terms included in ‘ESG’, private investors rate the environment as most important at 3.5 on a scale of one to five, while governance comes second at 3.2 and social issues – in 3.1. .

– When asked to rate the importance of specific issues, 60 percent ranked climate change, 56 percent transparency and disclosure, 55 percent pollution, 46 percent waste prevention and 41 percent human rights.

– About 53 percent would completely exclude from their portfolios investments related to child labor, 43 percent – pornography, 40 percent – repressive or controversial government regimes, 34 percent – firearms, 32 percent – animal rights violations, 32 percent – tobacco and 13 percent. fossil fuel.

– The share of investors who believe that the use of ESG criteria is more likely to improve profitability decreased from 33 percent to 22 percent, and those who expect a decrease in profitability increased from 20 percent to 25 percent.

– About 14 percent believe ESG investing is likely to be less risky than other investments, up from 20 percent last year, compared to 29 percent who believe it is a higher risk, up from by 23 percent.

– And 45 percent believe they will have to pay higher fees for ESG investments, while 5 percent believe fees will be lower.

AIC surveyed more than 400 private investors of different ages, genders, investment assets and regions, but all had money to invest and at least one investment product.

All chose some of their own investments, although just over a quarter also used the services of a financial adviser or wealth manager.

AIC’s Annabel Brodie-Smith says: “Private investors are clearly interested in ESG disclosure and find several types of disclosure useful.

“However, there is a preference for being clear and factual, rather than disclosures that may seem more abstract or subjective.”

What are investors saying?

The AIC highlighted the following investor comments from its survey.

On the green label: “For organic products, there is the Soil Association, so you know that if you buy a product that has the association mark, their organic standards are actually really strict and you know you have a good product. With something like ESG investing, would there be an equivalent?”

Interacting with anti-deprivation firms: “I believe in giving people a chance, but they have to show that they’re making an effort to make a difference… There’s a step where you say enough is enough, and then those shares have to be sold.”

What to exclude from ESG investments: “I would certainly look at what’s in the top 10 holdings because there are some things I just wouldn’t invest in. Some of these would be gambling companies and, to some extent, possibly major oil and fossil fuel companies. I would like to avoid too.’