The practice can lead to consumers investing in areas which don’t match their values, committee warns.
The government and regulators have been urged to stop the ‘greenwashing’ of financial products being mislabelled as more ethical than they are.
MPs have warned that greenwashing risks encouraging someone to invest in a product they think meets environmental, social and governance (ESG) criteria when really it may not. (click to tweet)
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The warning came from a report by the Treasury select committee, which has scrutinised the role of the Treasury, regulators and financial services in supporting the government’s 2050 net zero carbon emissions target.
The reports says: “We heard evidence that greenwashing—where products or funds are labelled as ‘green’ or sustainable but may not be so—may be an issue, with the potential to mislead consumers and cause capital misallocation.”
It suggested that funds could use climate risk labels that show their carbon intensity, as some are already doing, such as BlackRock.
The report also highlights issues with passive indices labelled as green that may not actually meet ESG requirements due to some of the companies involved.
The chancellor expanded the remit of financial regulators during the March 2021 Budget to include working towards the UK’s net zero commitment.
The report recognises that the financial services industry broadly accepts that greenwashing is detrimental to good consumer outcomes and to the achievement of the net zero goal.
It adds: “The Treasury must work with the Financial Conduct Authority to ensure that the regulator has the appropriate remit, powers and priorities, and uses its powers, to prevent greenwashing of financial products available to consumers.”
David Macdonald, founder of advisory firm The Path, which focuses on impact investments, says financial planners and wealth managers also need to change their approach.
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He says: “Consumers are no longer content simply ignoring how their hard-earned money might be funding warfare, lung cancer cases or climate destruction.
“ESG investment returns have been demonstrably better. Unfortunately, the models have not changed with the times. While the vast majority of IFAs do have a well-thought-out investment management strategy, most fail to adequately cater to the serious ESG investor.”
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