But greenwashing and mis-selling prevent investors from achieving their sustainability objectives, according to a series of new reports and consumer-focused surveys by the 2° Investing Initiative.
This research is designed to help shape the financial reform agenda in the European Green Deal and policy initiatives under the Sustainable Finance Action Plan (namely the Ecolabel for Financial Products, which will be debated at a working group meeting on March 25th, and the revisions under the Markets in Financial Instruments Directive (MiFiD)).
Most retail investors want to invest sustainably
Two-thirds of French and German retail investors say they want to invest in an environmentally responsible manner, according to “A Large Majority of Retail Clients Want to Invest Sustainably,” one of a series of four reports published today by the 2° Investing Initiative (2DII). The research initiative is part of 2DII’s Sustainable Finance and Consumer Protection program, which has received funding from entities including the European Commission, Hewlett Foundation, and EIT Climate-KIC.
43% of respondents interested in sustainable investing said their main goal is to have an “environmental impact” in the real economy. Notably, retail investors appear willing to “put their money where their mouth is:” 64% accepted a hypothetical -5% trade-off on their total returns in order to invest sustainably.
But 2DII’s research shows that most consumers face major roadblocks in fulfilling their sustainability objectives. According to preliminary results from 100 mystery shopping visits in France, financial advisors almost never ask about clients’ sustainability preferences. And even when prompted by clients, most advisors still offered them unsuitable products.
99% of EU “environmental impact” funds’ claims were misaligned with regulatory guidance
2DII’s second report in the series, “EU Retail Funds’ Environmental Impact Claims Do Not Comply with Regulatory Guidance,” indicates that greenwashing is rampant – even in the socially responsible investing sector. According to an in-depth analysis of a sample of 230 “sustainability-themed” European funds, 2DII finds that 52% of them made environmental impact claims of some kind. 99% of these claims were misaligned with guidance that requires them to be specific, unambiguous and substantiated.
Consumers would support the Paris Agreement with their investments
In the final paper, “Retail Clients Want to Vote for Paris”, 2DII finds that most European citizens support environmental issues at the ballot box and would do the same with their investments if possible. According to 2019 survey results, when asked how they would respond to ethical, social, or environmental concerns with their investments, 85% of respondents opted to take action. Most of this group favoured continued engagement with the company through voting as the best means to address those concerns.
Based on these results, 2DII estimates that roughly 20-40 million Europeans would vote in support of the Paris Agreement. However, this level of support is not replicated in the votes cast at company general meetings by financial institutions.
A deficient regulatory response
2DII’s “Feedback on the second version of the Ecolabel criteria for financial products” finds that developing legislation is expected to only exacerbate this problem. For example, there is still no way to measure how products on the market today meet the requirements of the draft Ecolabel criteria in terms of “investor impact.” This means that if anything, the Ecolabel will only further enable unsubstantiated, potentially deceptive environmental impact claims.
Policymakers must ensure new regulations empower consumers to achieve their investment goals by taking the following steps:
- Build a framework to assess the evidence of investment strategies’ “environmental impact”
- Develop regulatory guidelines focused on finance-sector impact claims
- Clarify requirements relating to the suitability assessment, provision of investment advice, and disclosure requirements relating to voting behavior and voting policies for financial intermediaries
Stan Dupré, CEO and co-founder of 2DII, said, “As the largest holders of financial assets in the EU, as well as the ultimate asset owners and beneficiaries, consumers play an important role in the shift towards a more sustainable financial system. However, our research shows that while consumers wish to invest sustainably, investment strategies are massively misaligned with consumers’ expectations. With flows to sustainable funds more than doubling in 2019, it’s critical that EU policymakers empower citizens to fulfill their investing objectives.”
The papers in the series are available here:
- A Large Majority of Retail Clients Want to Invest Sustainably: Survey of French and German retail investors’ sustainability objectives
- EU Retail Funds’ Environmental Impact Claims Do Not Comply with Regulatory Guidance: Analysis of a sample of 230 funds against the criteria of the EU Multi-Stakeholder Dialogue on Environmental Claims
- The draft criteria of the Ecolabel on financial products and the second technical report are still misaligned with the requirements of the Ecolabel Regulation: Feedback on the second version of the Ecolabel criteria for financial products
- Retail Clients Want to Vote for Paris: Analysis of retail clients’ preferences regarding the use of shareholder rights on climate resolutions