Investors are being left confused by ill-defined labels for ethical financial products, a new report from Which? has found.
There is often a mismatch between fund management definitions and what investors understand to be “ethical,” says the consumer champion.
Some have gone so far to say this amounts to “greenwashing,” suggesting the FCA should crack down on companies producing misleading marketing materials.
Which’s survey of 2002 people found that very few people could pick the correct definition of ethical investing. Nearly 40% of those polled said they held these types of funds.
Only one in 10 of investors could accurately define it, meaning they were only marginally more in the know than non-investors, 6% of whom got it correct.
When quizzed over the definition of commonly used green investing terms, confusion was rife.
Even the best known – Environmental, Social and Governance (ESG) – was only correctly defined by 31% of the investors polled, and just one in six (16%) non-investors.
When asked to rate their own understanding, a third (34%) had never heard of Sustainable and Responsible Investment (SRI), which denotes a wide range of investment strategies that focus on ethical, social and environmental issues.
Four in 10 (42%) had never heard of impact investing, and nearly half (45%) had never heard of dark/light green investing.
What’s more, labels funds use are unregulated, and therefore often left open to flexible interpretations of what ethics entails.
For example, a traditional ethical fund, with a focus on climate change, might exclude an energy and petrochemical company for its involvement in fossil fuels – a process known as negative screening. A fund with a ‘light green’ label might embrace an oil company, because of its extensive wind power and solar businesses (known as positive screening), said Which?
Businesses that have made climate change plans might be considered ethical, even if their business contributes to factors that have sped up global warming.
Jenny Ross, Which? money editor, said: “With such a bewildering array of products and confusing labels for investments claiming to be ethical it’s no surprise that concerns have been raised about greenwashing in the industry.
“It’s time for the industry to clean house. It should establish unambiguous definitions for ethical investments and these should be regulated by the FCA so that consumers have the information they need to avoid investing in causes they are opposed to.”