If you are invested in funds labelled as ‘sustainable’ or ‘green’ – or considering investing – you’ll rightly be concerned about ‘greenwashing’. This is when a fund house makes overstated or potentially misleading claims about the sustainability of their investments.
The Financial Conduct Authority is responding to concerns about greenwashing with new fund labelling rules due to be announced shortly. These are expected to differentiate between three types of sustainable fund and require fund managers to evidence both financial and non-financial impact.
The three types are:
- Sustainable Improvers: The fund manager proactively engages companies in their portfolio to deliver measurable improvements in their sustainability profile
- Sustainable Focus: Funds invest in companies that meet a credible standard of sustainability
- Sustainable Impact: Funds invest in companies specifically providing solutions to environmental or social problems, with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes
Tell-tale warning signs
There are lots of investment funds that take sustainability seriously but there are also plenty that don’t. Here are six tell-tale signs that a ‘sustainable’ or ‘ESG’ labelled fund you’re invested in, or considering, might not have the positive social or environmental impact you expect.
Blinded by buzzwords
Is it clear how sustainable outcomes form part of the investment strategy, the process used to achieve the strategy, and reporting on achieving sustainable outcomes? Does it feel like buzzword bingo, with little substance beneath? Or is what the fund manager is trying to achieve, and how this aligns with its sustainable objectives, clearly articulated?
Hiding in the fund
A recent report found ESG-labelled funds invested more than $1.5bn (£1.2bn) into fossil fuels. We think every sustainable-labelled fund should disclose all of its portfolio holdings. Instead, it’s more common for only the top 10 fund holdings to be published on factsheets.
You should dig deeper into what your money is invested in; check the annual reports. As this is not always easily accessible for an individual investor, the lack of transparency disadvantages direct investors compared to larger institutions with better resources, in choosing authentic sustainable investments.
From that list of portfolio holdings alongside a clearly articulated investment strategy, it should make intuitive sense how each contributes to the fund’s sustainable objectives.
Sin stocks and stable mates
See what other funds the manager runs and judge the manager’s overall commitment to sustainable investment. Does the same team or business also run funds with no commitment to sustainability?
This doesn’t mean they can’t stick to the investment remit of your sustainable fund, but it does indicate the level of personal and corporate commitment. Firms offering a range of both sustainable and ‘non-sustainable’ investment strategies are hedged – they potentially stand to benefit whether the sustainable product they’re offering you does well or not.
Industry bodies
Membership of UKSIF and UNPRI is no bad thing, but it has become pretty standard now. So if your fund manager’s main proof of its commitment to ‘sustainability’ is membership of the UNPRI, that feels like a red flag.
Are they members of the Net Zero Asset Managers Initiative and are they part of wider NGO-led initiatives such as those led by ShareAction and the IIGCC, for example? A fund manager committed to sustainable investing will be able to demonstrate much deeper engagement in the many industry networks and consultations, including involvement in committees and working groups.
Basic or integrated
Beware of sustainable-labelled funds whose investment process is limited to a basic screening of stocks using a third-party data provider.
This isn’t inherently wrong, but it may not match with investment conviction claims. Similarly, if the environment, social and governance (ESG) team or the corporate social responsibility team is not embedded in the investment decision-making of the fund, but acts more as a satellite research arm, then it probably isn't having an impact.
Walking the walk
Billboards emblazoned with sustainability slogans mean little if the investment company gives little thought to its own ESG responsibilities. Look for corporate policies and activity, impact reports and news coverage to get a feel for the company behind the fund marketing.
Overall, you should have developed a sense of whether the fund has a clear mission that fits one of the FCA’s likely sustainable labels. But you should also see clear evidence linking the investments with this objective and measurements that back it up. Trust your instinct on whether the ‘green’ fund really passes the ‘sniff test’.
The author is managing partner at WHEB Asset Management
