This article is from the latest Good Investment Review, from Good With Money and Square Mile Research.
A global pandemic, the Russian invasion of Ukraine, and wildfires and flooding caused by climate change have focused minds when it comes to responsible investing.
More people than ever are aware of the connection between finance and the health of the planet and society and are looking to invest their money for good.
However, as demand for responsible investing grows, so do concerns over whether funds are genuinely making a positive impact on the wider world or ‘greenwashing.’ This is where companies or organisations make inflated claims about how environmentally friendly they are.
A study by fund manager Liontrust in September 2021 found that 51 per cent of investors had chosen to invest sustainably (up from 41 per cent a year earlier), but it also showed that even professional advisors are worried that some funds are just window dressing.
Barriers to Responsible Investment
One major hurdle for investors is the seemingly interchangeable labels used by the industry such as responsible, sustainable, ethical, impact and ESG. The proliferation of these different terms enables some funds to benefit from a smoke and mirrors effect, perhaps disguising which sectors and companies they are actually investing in.
For example, research by Triodos Investment Management shows that of the top ten companies included in several well-known sustainability indices, only one meets Triodos IM’s strict minimum standards.
Investors are looking for more help with navigating this increasingly crowded – and confusing – space. A study by Triodos Bank in March 2022 found that investors now expect more from their fund managers than risk and return – they also want them to look into sustainability issues in greater depth.
The majority (83 per cent of those polled), want or expect to see their fund manager up-skilling in sustainability and environmental issues, while 85 per cent want or expect their fund manager to help avoid “greenwashing” claims.
In just a few years, ESG has become a buzzword for defining the ethics of a fund. However, funds with this label can vary dramatically in their approach as there are currently no standard measurement tools for the E, the S and the G. Often, they focus simply on screening out companies involved in industries that are harmful to the planet and people such as fossil fuels, tobacco and gambling, rather than including those that are proactively sustainable.
Advance as well as avoid
This focus on ‘avoiding the bad’ rather than ‘advancing the good’ generally doesn’t live up to what many investors now want and expect, which is to actively invest in companies working on solutions to the world’s biggest issues such as climate change, biodiversity loss and poverty.
The lack of an industry standard measurement tool makes it difficult to understand and compare responsible funds. If investors truly want to invest for positive impact, it can require wading through a lot of claims about “green-ness” in order to work out exactly what these funds aim to do and how.
All this leads to a risk that investors with good intentions are left too confused to take any meaningful action with their money.
The need for regulation
While the responsible investing sector has mushroomed in recent years, financial regulators have struggled to keep pace with ways to police the sector.
A study by fund manager Liontrust in September 2021, found that 51 per cent of investors had chosen to invest sustainably (up from 41 per cent a year earlier), but it also showed that even professional advisors are worried that some funds are just window dressing. According to Catherine Howarth, chief executive of campaign group ShareAction, this has created a “limbo period where consumers are at risk of buying products that say they’re doing something they’re not doing”.
The magnitude of this issue is highlighted in a report by climate think-tank InfluenceMap, which revealed 421 out of 593 “ESG” equity funds it monitored were not aligned with the Paris Agreement climate targets.
Thankfully, there are signs that regulators are starting to crack down on greenwashing, with a swathe of new rules now in the pipeline.
In July 2021, the Financial Conduct Authority confirmed that greenwash is a growing concern, saying that regulatory applications by ESG funds “often contain claims that do not bear scrutiny.” It recently closed a consultation on whether climate-related disclosures should be mandatory for asset managers.
The ‘Good Egg’ mark
The rapid rise in both supply and demand for responsible investing in just a few years has led to an urgent need for tighter regulation and clearer labelling.
Research by the UK Sustainable Investment and Finance Association (UKSIF) in 2015 showed 63 per cent of UK consumers wanted a label to identify responsible or sustainable financial products.
This led to Good With Money launching the UK’s first mark – the ‘Good Egg’ – to make it easier for people to find financial products from savings and investments to current accounts and insurance that offer a good deal for their pockets as well as for people and planet.
With an ever-increasing desire from investors to bring about positive change with their money, it’s now more important than ever for responsible investing funds to be easily understandable and trustworthy.
Risk warning: The Good Investment Review provides general information only. It is not financial advice. If you invest in any of the products mentioned in the review, you do so at your own risk. This is not a recommendation to buy or sell any funds mentioned or engage in investment activity with any particular fund manager. Capital is at risk and past performance is not a guide to future performance.