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Insufficient Mutual Fund Regulation

March 8, 2011

Ethical mutual funds do not provide sufficient risk information or on the implications of the ethical considerations being made, research shows from the University of Gothenburg.

Ten years ago there were only a handful of ethical funds in Sweden; today there are over a hundred and ethical investments are expected to continue grow. Nevertheless, in practice there are considerable problems with ethical fund management due largely to the fact that the existing information requirements are not optimal, which makes it difficult for mutual fund investors to make informed decisions. Ethical funds should therefore be made subject to stricter regulation and standardized information must be established to enable comparisons between different funds. These assertions are made in a new thesis by Sebastian Siegl, a researcher at the Department of Law at the School of Business, Economics and Law at Gothenburg University who is also associated with the MISTRA program SIRP ““ Sustainable Investment Research Platform.

At present there is no clear definition of what may be referred to as an ethical, social or environmental fund. Funds are often called ethical funds when they include ethical, social or environmental aspects into the investment decision, for example by avoiding investments in industries such as alcohol, gaming, pornography, tobacco and weapons or in companies that are not environmentally friendly or that infringe international rules. However, in order to assess ethical investments accurately, financial advisors need to have access to clear information which, according to Sebastian Siegl, a researcher in commercial law at the School of Business, Economics and Law in Gothenburg, does not currently exist.

“At present there is some confusion with regard to how fund management companies report the implications of the ethical considerations and in some cases one can question whether those who are engaged in ethical fund management are acting ethically in relation to the investors since they do not provide their customers enough information to make informed decisions”, says Sebastian Siegl.

Sebastian Siegl’s suggestion for solving the problem is stricter regulation of ethical fund management which, he states, is not only based on how fund managers behave in practice. Siegl considers that information on ethical funds should be standardized to facilitate comparisons between different funds and that the information should be more focused on the implications of risk.

“Another measure to improve the situation would be to divide funds into two main categories: funds striving to achieve best possible risk-adjusted return and funds with parallel aims, such as to achieve a socially or environmentally related objective”, concludes Sebastian Siegl.

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