- The popularity of ethical investing has left room for firms to mis-sell products to investors
- A new directive from the FCA looks set to clean up the sector and simplify the selection process
- The reasons to invest with an ethical mindset are clear, but doing so is currently more problematic than it ought to be
The UK’s financial regulator has stepped up its efforts to clamp down on prominent high-street name investment managers misleading investors with claims that their products are “green”. Preventing the misselling of investment products is one of the FCA’s key mandates, so the directive against “greenwashing” makes complete sense, given the prevalence of the practice.
Reasons To Invest In Ethical Funds
The move by the FCA comes at a time when ethical investing is an increasingly popular area of the financial markets. Those buying eco-related products no longer have to sacrifice financial gains as the influx of capital is good for asset prices. In the ten years up to 2020, average annual returns on ethical funds were 6.9% compared to 6.3% for traditional funds.
The FCA’s move will introduce a new range of user-friendly labels designed to help investors allocate their capital with greater confidence. The current practice of tagging funds as “green” or “ESG” gives too much wriggle room to fund managers who are aware of the appeal of ethical products.
Demand for “responsible investments” is reported by the Investment Association as being so great that a third of net inflows into UK retail funds in 2021 went into ethical products. That partly explains the misleading practice of one investment manager highlighted by the FCA, which reported:
“One example was a sustainable investment fund containing two ‘high-carbon emissions’ energy companies in its top-10 holdings, without providing obvious context or rationale behind it.” FCA
How To Invest In Ethical Funds
The financial returns associated with ethical funds are attractive in their own right. However, many who buy ethical investment products want to ensure their capital supports firms which make a difference. The move by the FCA will make it easier for investors to identify firms which treat their employees and stakeholders with respect, create healthy products and services and steer clear of unethical business practices.
Finding a legitimate, ethical fund in the current market is still possible. The added regulation applied to fund-style products is another plus point for the sector. But if you aim to fine-tune the process and build your own portfolio of ethical stocks for long-term returns, then avoid CFDs and stick with buying stocks outright to avoid unnecessary administration costs.
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