EU watchdog blasts failings in investment industry, including ESG

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(Bloomberg) — European efforts to create a single, liquid and transparent market for investors are falling short, according to the region’s top government watchdog.

The European Court of Auditors, which oversees EU finances, said the creation of a single market more than three decades ago has fostered transparency around risks, returns and fees. But “investors are still not sufficiently protected against various problems”, according to a report published on Monday.

These include “undue costs resulting from opaque sales practices”, as well as “biased advice from financial intermediaries leading them to products that are not well suited to their needs”, he said.

According to the report, the European Union must make significant adjustments to the structures that shape its investment sector if it is to remedy the shortcomings. “Minor revisions to the legal framework alone will not be enough to achieve a genuine single market,” he said. The recommendations will be considered by the European Parliament and the Council of the EU.

The report also examined to what extent investors have a reasonable chance of navigating the rapidly growing market for environmental, social and governance (ESG) products. Last year, the EU enforced an anti-money laundering regulation known as the Sustainable Finance Disclosure Regulation in a bid to protect investors. But according to Monday’s report, it’s unclear how effective SFDR has been.

“It is too early to assess its impact,” the listeners wrote.

The report also warned of the lack of regulation surrounding ESG ratings and “other assessment tools”, noting that the European Securities and Markets Authority “has recently called for legislative action” in this area.

The warning comes amid growing signs of greenwashing. Earlier this month, ESMA said it had observed a “disconnect” between what fund managers tell ESG clients and their actual allocation strategies.

©2022 Bloomberg LP

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