The Financial Conduct Authority (FCA) has been called on to conduct a review of ethical strategies by SCM Direct amid “widespread misclassification and mis-selling”.
The call follows research conducted by SCM Direct which found a number of ESG products had exposure to companies in tobacco, gambling and alcohol industries.
The report, entitled Greenwashing: Misclassification and Mis-selling of Ethical Investments, highlighted two index funds in particular that had “significant” amounts of these industries in, the L&G Future World ESG UK Index and the Vanguard SRI European Stock fund.
According to Bloomberg, 11.4% of the L&G fund was invested in tobacco, alcohol, gaming and defence stocks despite the factsheet stating it “gives greater weight to companies that score well against ESG criteria” while 5.7% of the Vanguard fund was invested in these industries.
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In response, Vanguard said the fund aims to exclude companies based on the UN Global Compact including human rights, labour rights environment, corruption and controversial weapons while also having a screen on tobacco companies.
Vanguard said in a statement: “There are different flavours to socially responsible investing. Investors should look closely at a funds methodology and exclusion policy to ensure it matches their beliefs.”
ESG investing has boomed in popularity in recent years with the European and US ESG funds market growing from $453bn in 2013 to $760bn, however, greenwashing remains an issue.
For example, in June, it was reported a number of gun companies had been included in one of Vanguard’s ESG index funds despite the prospectus stating it excluded this industry.
SCM Direct, which was founded by 30 Index winner Alan Miller and anti-Brexit campaigner Gina Miller, concluded: “It is shameful that the investment industry is prepared to pay lip service to such considerations to gain assets and fees, and even more shameful that the UK regulator does not appear to have taken any action against firms greenwashing and thereby meet its strategic objective to ensure that markets function well and its operational objective to protect consumers.
“Based on this research, it is the view of SCM Direct that the UK regulator should conduct an urgent industry review, rather than its normal strategy of stepping in after investors have already been exploited.”
However, the FCA said in response the SCM Direct report has failed to recognise the work it is doing around greenwashing such as the 2018 paper on Green Finance.
An FCA spokesperson said: "We require asset managers to be clear about their funds’ investment strategies and this includes clarity over any ethical investments they claim to make.
"All UK authorised funds require FCA approval to market to retail customers. Both ahead of their launch and where we discover potential problems after, we challenge firms over their funds’ marketing materials to ensure the strategies they describe reflect how they operate in practice."