This article is an excerpt from the Good Guide to First Time Investing, sponsored by impact investing specialist Triodos Bank. Download your free copy to find out how to get started with investing for good.
‘Toto, we’re not in Kansas anymore.’
There’s no doubt that the world has shifted. In many ways, the pandemic couldn’t have come at a better time for the planet. And what was once the preserve of ‘sandal wearing hippies’ has thankfully now gone mainstream. It needed to.
However, a growing mass market interest in something small, boutique and undiscovered, often leads to increasing attempts by big multinationals to get in on the act.
Sharp rise in sustainable investing
Impact or responsible investing is no different. Good With Money’s Good Investment Review, produced together with Square Mile Research, highlights how over the past five years responsible investing has been one of the fastest growing sectors of the market. The most recent Good Investment Review revealed that ‘assets under management’ in sustainable investing funds have risen by a whopping 40 per cent in the last six months alone. With this fast-growing number of funds comes a never-ending roundabout of seemingly interchangeable terms.
And with that growth in the market comes increasing incidences of greenwash. The proliferation of different terms allows some companies to hide behind a name, perhaps disguising what’s really going on with these funds and in which sectors and companies they are being invested. For example, figures from Triodos Investment Management reveal that, of the top 10 companies included in several well-known sustainability indices, only one company meets Triodos IM’s strict minimum standards.
Cracking down on greenwash
Luckily, the powers that be have also cottoned on to increasing greenwash. The UK Treasury recently published a report recognising that ‘greenwashing by financial firms and their beneficiaries may be an issue’. It also recommended ensuring the Financial Conduct Authority (FCA) has “the appropriate remit, powers, and priorities” to prevent greenwashing.
Furthermore the Treasury, together with the FCA, is planning to launch a consultation on whether climate impact labelling should be mandatory for financial products such as investments, pension plans and mortgages.
This is supported by the Triodos Bank data, which revealed that consumers are also calling for increased transparency when it comes to avoiding greenwashing. Almost two thirds (64 per cent) of those polled say there needs to be industry- wide standardisation for the definition of ‘sustainable’ or ‘ethical’ funds.
In addition, the Competition and Markets Authority (CMA) is developing new measures to stop companies from publishing misleading claims that overstate their positive environmental impacts – and to hold them to account if they do. The EU is also introducing a new classification regulation (the EU Taxonomy) to define the huge range of sustainability terms to provide greater clarity and make it easier for investors to compare like with like.
Reshaping the sector
Chair of Triodos Investment Management Jacco Minnaar says these steps will “ultimately change the market by reducing green-washed product offerings” and, “will reshape the sector through innovation and product development.”
He adds, “We need smart, active investment that not only achieves environmental improvements but also takes a position on broader societal issues like food security, education and healthcare.”
He says investors should ask themselves: ‘Am I convinced that my money is meeting my impact, risk and return objectives?’; ‘What happens when I invest in this fund?’; ‘What is my asset manager’s vision?’; and ’What companies are in my funds’ portfolios?’.
Here are Good With Money’s three questions to ask:
- Which companies does the fund invest in? Only revealing the Top 10 holdings is not enough – the firm should detail every sector and company the fund invests in, and why it does, or why not. What else do they invest in? Does the firm offer one or two ‘token’ sustainable funds amidst a sea of mainstream (= fossil fuels) funds or do they have proven depth and breadth in the sector?
- How long has the investment firm or fund manager been managing money in sustainable sectors? Are they truly experienced or are they just hitching a ride on the bandwagon?
- How engaged are they? Do they regularly vote on corporate issues that matter to you, challenging companies and maintaining a dialogue with them on tricky issues, or is there little evidence of this?
When thinking about investing for impact – and investing for the first time – having these questions in mind will help you decide on the funds or fund manager that are demonstrably aligned with your own personal values.