A marked change in the investment landscape over the past couple of years has been the explosion in ethical or impact investing.
Undoubtedly a positive force for society and the environment, this policy is about investing positively rather than being agnostic about where our money is invested or ignorant of where it is invested, potentially funding industries like arms or tobacco, which some people have ethical issues with.
However, creating an ethical or impact fund isn’t just about putting the word ‘green’ in front of the fund name. You might think ‘So what? This isn’t just a problem with investing. Many of us are used to products that don’t live up to expectations.’
After ‘ESG investing’ hit headlines, some providers reacted and rushed to create funds with an ethical theme to meet demand. As ethical investing is still a relatively new concept, consumers were left to judge for themselves whether or not a fund met their investing values. It also coined the term ‘greenwashing’ where it appeared that so-called ethical funds were ethical only in name because nobody dug deeper. With no single industry-wide standard, interest in green investing still growing, this could lead to mistrust towards ethical investing. How can you avoid greenwashing?
1. Don’t rely on a fund’s title
Don’t make your investing decisions based on a fund’s name. Simply calling a fund ‘Green’, ‘Sustainable’, ‘Ethical’, ‘SRI’, ‘Responsible’, ‘ESG’ or ‘Impact’ isn’t enough. The list of terms is growing. Do your own research. Look for evidence that the fund lives up to its promises.
According to the UK’s Investment Association, 26% of total assets under management within the UK are being managed with a responsible investment approach. But what does this mean, when there is no one clear standardised definition of what a ‘green’ or ‘ethical’ fund is, or what a ‘responsible approach’ involves. As a consequence, greenwashing is rife within this sector.
What is greenwashing?
Many sources define greenwashing as ‘The process of companies engaging in marketing or public relations strategies to appear aligned with ESG (ethical, social, governmental) objectives.’ This creates another question. What are ESG objectives?
For some this means avoiding ‘sin stocks’. Many ethical funds use negative screening to filter out sectors such as tobacco, alcohol and gambling as a matter of principle – but not all. This is one example of the challenge the industry faces without a standard set of rules regarding what makes an ethical fund.
2. Is it greenwashing? You decide
Vehicle and energy companies aren’t necessarily excluded from ethical fund selections. Many of these companies fund research into improvements in the environmental impact of their products and supply chain. Take a look at the principles guiding the investment decisions of a fund. It’s then up to you to decide on your investing principles.
Under the microscope
While we have discussed some of the issues surrounding greenwashing, research indicates that European funds marketed as sustainable are more likely to be top performers. Funds investing in companies who are managed responsibly may be able to deliver better financial results over the long term and are likely to face fewer reputational and operational risks. Wren Sterling believes people should have the option to invest purely in sustainable funds.
3. Talk to a financial adviser
You don’t have to take advice when investing – but the support and expertise of an Independent Financial Adviser can help you develop your portfolio without any nasty surprises.
Are you concerned that your portfolio isn’t as green as you thought? If you’d appreciate the support of a financial adviser and an investment review, let us know.
The value of an investment can go down as well as up, your capital is at risk.