Investors at risk of ‘ethical mis-selling’ as funds hold oil, gas and nuclear weapons

Investors who want to put their money towards a more sustainable future are at risk of falling foul of the biggest scandal since PPI, experts warn.

Telegraph Money found that seven funds claiming to factor in ethical or environmental, social and governance (ESG) issues were pumping £2.7bn of investors’ money into oil and gas companies. Further research using Morningstar data found nuclear weapons firms or companies such as Nestlé and Amazon – which have been plagued by lawsuits over workers’ rights and pollution – are among the holdings of 42 “responsible” funds.

Steven Bell of investment firm BMO said investors could be disappointed by what some firms defined as “responsible”. He added: “We could well see claims management companies moving from PPI to go after asset managers for mis-selling ESG and ethical funds.”

There are at least 10 different ways for companies to express the idea of trying to do good with your investments – none of which has a universal definition. Confusion has meant investors putting money into exchange-traded funds (ETFs) such as the iShares MSCI Europe ESG Screened ETF and the UBS MSCI EMU Socially Responsible ETF only to find themselves holding oil and gas firms including BP and Total, despite the funds claiming to take account of ESG criteria. Another iShares fund with a sustainable focus, the MSCI ACWI Low Carbon Target ETF, holds three oil and gas companies as well as four firms involved in the manufacturing of nuclear weapons. UBS and iShares said they provided clear guidance on the construction of the portfolios and that investors should visit their products pages to pick portfolios to suit them. The funds all track MSCI indices. The ESG Screened Index excludes companies extracting oil sands, but not conventional oil – deemed to be less harmful to the environment – which is why Total can be held by the iShares fund. The Socially Responsible Index identifies the best companies within a range of key sectors, including energy, so it too can hold oil companies considered the best of the bunch. Last week, the Investment Association, a trade body for the fund management industry, attempted to tackle the issue by launching a set of labels for categorising “responsible investment”. Yet industry insiders have said its attempts have fallen flat. Use of the labels is not mandatory and it will be the investment companies themselves that decide which funds fall under which labels. Hortense Bioy of Morningstar said there would be room for interpretation, as with all self-reported data. “The framework will not necessarily help investors differentiate between asset managers who are truly responsible and those who are just ticking boxes,” she said. An Investment Association spokesman said the framework was a first step and it would create clearer definitions after consulting with members.

£2.7bn The amount of investors’ money held within ‘responsible’ funds that invest in oil and gas companies