ESG product gold rush brings dangers of mis-selling scandals, says Capco

Environmental, social and governance (ESG) investments now dominate the European asset management market. More than half the money that flowed into European funds in 2020 – a total of €1.4 trillion – was placed in sustainable products.

A recent survey by Capco found that 63% of 550 global financial service professionals considered their products to be green friendly, while 64% said products due to be launched were designed to be socially and environmentally friendly.

The paper, Climate Conduct & Financial Services: Tomorrow’s Mis-selling Scandal?, suggests that the “gold rush” to launch new ESG compliant products carries a potential risk of mis-selling if the true underlying nature of these products is misrepresented.

Capco’s report highlights examples of ESG-related mis-selling, such as the Volkswagen diesel scandal and the UK Green Deal scandals, and warns that financial services businesses must learn from these lessons.

Five core principles are identified by the report that firms should be adopting to avoid this risk:

• Embed climate risks and opportunities at the highest level, with dedicated risk management function, board, and executive level representation.
• Take a holistic view. Capco has reviewed 63 separate disclosures covering climate risk management, and only a handful identify climate conduct as a material first or second order risk.
• Work through product lifecycles, applying risk assessments around green products and considering their full lifecycle, including interaction with third parties, such as providers of ourtsourced services in order to ensure risk management and controls are equivalent to the firm’s own.
• Approach the data challenge to complete full lifecycle assessments of their products, and ensure they are able to make valid and substantiated claims about their products. This will become easier as global taxonomies provide clearer ESG labelling guidelines.
• Constantly revisit and review their own frameworks on a timely basis, or risk being left behind or failing to meet new standards of disclosure. COP26 will place greater pressure for action and frameworks may become mandatory.

“If the lessons of previous mis-selling mishaps are learned, then this could be the defining opportunity for the next generation of financial services’ customers, firms, employees and executives,” said the report’s authors. “If not, it has the potential to damage not only individual firms’ balance sheets and reputations, but also broader efforts to make sustainable finance a reality – and ultimately the very future of our planet.”