Tens of thousands of investors who thought they had made the right choice in buying a green fund will soon be faced with a tough decision: stick or wiggle.
New regulations, to be finalized in July by the Financial Conduct Authority (FCA), could lead to the declassification of hundreds of green investment funds as the regulator cracks down on greenwashing – the cynical marketing of a fund as green when he is not.
Investors caught up in such mislabeled funds will face a stark choice: stay put and compromise their principles; or switch to an alternative fund that meets the FCA’s new criteria.
Investment manager Alan Miller, who led the way in exposing greenwashing in the investment fund industry, says investors shouldn’t have to bear the cost of a switch – or the burdens resulting taxes such as capital gains tax.
Miller, co-founder of wealth manager SCM Direct, told the Mail on Sunday: ‘You may wonder if the new green fund labeling regime is good or bad. But the bottom line is there will be a cost that the FCA should have considered – and that someone should pay.
Shock: Georgia Elliott-Smith discovered her green pension had been invested in Shell
He added: “Consumers thought they had a green fund. If they are told now that this is not the case, they should not have to pay the cost of switching to an alternative fund deemed green by the FCA. If you buy a new electric car that happens to be petrol-powered, you expect to be changed for free.
Miller said the overall cost to investors of this change could be more than £600million – and is adamant that investment management groups guilty of mislabeling funds should pay the tab.
“It’s definitely the fund groups that should pay the conversion fees,” he said. “In no other area of commerce would the consumer be obligated to pay the bill caused by the misrepresentation of others.”
The calculation on the back of Miller’s £600million envelope is based on a statistic disclosed late last month by the head of the investment funds trade organization – the Investment Association (IA). ) – before the powerful Commons Treasury Select Committee (TSC).
According to the IA, £95bn of investors’ money is held in ‘responsible’ funds. But under the new labeling regime put in place by the FCA, AI boss Chris Cummings said 70% of funds will no longer be able to market themselves appropriately to green investors.
Assuming half of the investors in these non-compliant funds switch their money – and factoring in fund switching costs and capital gains tax bills – Miller arrived at his potential consumer bill of £600 million.
Georgia Elliott-Smith is managing director of London-based sustainability consultancy Element Four. She was horrified to find that the company pension scheme she thought was green was invested in oil giant Shell. She moved it to another provider.
“Investors buy green funds because they want to do their part to save the world,” she says. ‘Finding that the product you have purchased is not as green as you thought is deeply disappointing.’
She adds: “If green funds have been mislabeled, it seems clear that the offending fund groups – not the investors – should be made to pay any transfer fees that investors face when switching to products. authenticated.”
Cummings warned TSC members that market “bubbles” could result from money shifting to a narrower range of FCA-approved funds. Yet it has been overlooked by some members.
Angela Eagle, Labor MP for Wallasey, accused Cummings of not thinking in the best interests of consumers. Like Elliott-Smith, she said no consumer investing in a green fund “would expect them to have exposure to energy companies.” She added: “If consumers feel they are being misled by claims of greenwashing – they currently are and unless we get it right they will be in the future – they will become very cynical. and not invest at all.”
The committee also extracted the FCA’s admission that in constructing its new labeling regime, the regulator had not calculated the cost to investors of wanting to switch funds.
Harriett Baldwin, chair of the TSC, told the MoS on Friday: ‘I am particularly keen that consumers who have invested in funds believing they are doing their part to save the planet do not bear the cost of moving their investment if they find out their fund isn’t so green after all.
The term “responsible” – as adopted by AI – covers a number of green and ethical investment strategies. These include exclusions (funds that exclude sinful stocks such as tobacco, oil and arms manufacturers) and sustainability (investing in companies that adhere to environmental, social and governance – ESG – standards. high). Also, impact investing – funds that invest in businesses that have a positive impact on the environment, such as wind and solar power generators.
Funds under this responsible banner have a multitude of labels, all designed to appeal to consumers who want to do their part to save the planet. They include environmental, ethical, green, socially responsible and sustainable.
Under the new FCA regime, green funds will be categorized under one of three labels: ‘sustainability orientation’, ‘enhancers’ and ‘impact’.
A fund can be classified in the “sustainable development” category if 70% of its assets meet “a credible standard of environmental and/or social responsibility”.
“Improvers” will be funds that will keep companies committed to improving their sustainability credentials over time. The “impact” group will include funds invested in companies that actively improve the environment.
The Interactive Investor fund platform offers investors a list of recommended green funds and calls on an SRI Services consultant to develop the 41 recommended funds.
On Friday, he told the MoS that until the FCA presents its final rules this summer, it cannot “assess the future direction of the list”.
Interactive also says it “widely” supports the new FCA labels, although funds excluded under the new regime should carry a “not promoted as sustainable” label in the interest of clarity for investors.
TOP FUNDING FIRMS REFUSE TO RESPOND
Silence Is Golden was a hit for The Tremeloes in the late 1960s. But it seems the song has been embraced by major investment firms when it comes to the FCA’s labeling of green funds.
A few days ago, The Mail on Sunday asked six key fund groups two key questions:
1) How many of your responsible/sustainable funds would not be rated in the new FCA categories?
2) Who do you think should pay the transfer fee (including any associated tax implications) of someone who sits in a green fund that does not comply with the FCA’s new labeling rules. The funder or someone else? Fidelity, Liontrust, Jupiter and M&G responded but declined to be drawn on the second question.
Fidelity said it was still trying to understand the impact of FCA’s proposals. Liontrust said it expected its line of “sustainable future” funds to be categorized as “sustainably oriented”. Jupiter said he “supports FCA’s intentions”.
M&G said it was important “for the industry to ensure our sustainability and impact funds meet investor expectations.”
Royal London declined to comment, while Janus Henderson did not respond.
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