UK retail investors have poured money in to responsible funds at an accelerating pace this year, even as the country’s financial watchdog warns that inconsistent standards could leave buyers unsure about what lies behind ethical investment labels.
Asset managers drew £4.3bn in retail money in to their responsible funds in the three months to the end of September, according to the Investment Association, the highest quarterly total on record. The flows made up a third of the industry’s total retail sales in the quarter.
But the green bonanza comes with concerns that some funds do not live up to their responsible branding.
At the start of November the Financial Conduct Authority launched a process to clean up the labelling and disclosure around sustainable investment products — warning that more consistency was needed so consumers can make informed choices.
“We have previously highlighted the risk of misleading . . . claims by products and providers,” the FCA said. “Without common standards, clear terminology and accessible product classification and labelling, there is a risk that consumers find it difficult to navigate the landscape of products and assess product suitability.”
A recent survey by the Association of Investment Companies found two-thirds of self-directed investors consider environmental, social and governance-related factors before deploying their cash, with climate change ranking first among their concerns.
The investment industry’s push to respond to this demand with green products and marketing has intensified questions over the best way for money managers to pursue environmental objectives. Some asset managers favour owning oil stocks and using their role as shareholders to push boards for change, for instance, whereas others prefer to avoid these shares altogether. At the same time, experts are also debating the climate credentials of different technologies and energy sources.
The many differing approaches to climate-friendly investing can make it difficult for retail investors and their advisers to find products that match their values, according to analysts.
In their rush to go green, some fund managers have made proposals that, the FCA said, are “poorly drafted” and “contain claims that do not bear scrutiny”.
The funds industry has acknowledged the need for clear communication, and said it welcomed the FCA’s move towards standardised labels.
“Today’s savers want confidence that when they buy a responsible and sustainable investment product, it matches their expectations,” said Galina Dimitrova, director for investments and capital markets at the Investment Association, the asset management trade body.
“We recognise the need for clearer, more consistent disclosure,” she said.
The FCA called for “initial views” on disclosure and labelling, with the aim of consulting on new rules by mid-2022. In the mean time, savers have continued to funnel billions of pounds each month into ESG-style investments.
Hargreaves Lansdown, the UK’s largest investment platform, said net flows into responsible funds in the first nine months of this year were 6,000 per cent higher than the same period five years ago.
The percentage of assets held in responsible funds has ticked steadily upward to reach 5.5 per cent across UK fund managers, according to the IA’s data, which counts sustainability-focused funds as well as those built around broader ESG or impact investing criteria.
Sales of responsible funds to retail investors have powered ahead since the Covid-19 crisis, and proved largely immune to ups and downs in total industry sales. Responsible fund sales advanced to £1.6bn in September, as the industry’s overall sales dropped by almost half.
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