This article is from the latest Good Investment Review, from Good With Money and Square Mile Research.
As sustainable investing and ESG (environmental, social and governance) increasingly move into the mainstream, greenwashing has inevitably become a growing concern.
In short, this is where groups are talking up their credentials in this space without the expertise or track record to back it up and spending more time marketing themselves as sustainable rather than actually minimising their harmful impact.
Research conducted on behalf of Liontrust in December 2021 showed 82 per cent of discretionary fund managers and 67 per cent of advisers are concerned about greenwashing and in the latter category, 57 per cent are either only slightly confident or not confident about identifying this practice in action.
For our part, the Sustainable Investment team has a 21-year track record, and we continue to work hard to be clear on the impact of our funds, producing detailed reports twice a year. These cover a broad range of metrics, both internal and from third parties, including exposure to our Sustainable Investment themes and the UN’s Sustainable Development Goals (SDGs), emissions profile (carbon intensity as well as exposure to fossil fuels and cleantech solutions) and ESG measures such as staff diversity and human rights.
Looking more broadly, we have come up with five ways to identify greenwashing and tell whether funds, and the teams behind them, can meet investors’ sustainable expectations.
A genuinely sustainable fund manager should be transparent about how they invest, as well as being open to challenge. This should include clear and simple information explaining how the team runs money: what companies they look for under the sustainable approach and what they avoid. It has to be more than generic ‘brochure’ comments like “sustainability is in our DNA”.
At the most basic level, a sustainable manager should be able to provide a full list of all the companies in which
a particular fund invests rather than just the standard top 10 that appears on factsheets. If they are unable or unwilling to do this, this is a red flag. Ultimately, investors should expect to see frequent communication giving an update on what is going on in funds, relating back to the investment
decisions and companies held. Anyone can write a generic report on climate change, for example, but how is the portfolio positioned in light of the challenges that combatting this will entail? As expertise builds, most fund groups should be able produce interesting content on something like electric vehicles, but avoiding greenwash lies in the ‘so what’ part of this – how does this knowledge influence investment decisions and the performance investors ultimately get? The managers should respond to queries about companies they are invested in and explain why they like them; again, if you cannot contact them or get a lacklustre answer, this should be cause for concern.
2. Experience and resource
As in any walk of life, we believe the experience and depth of a team is important when it comes to sustainable investing. There is nothing to say a new fund will not be a good investment and there are interesting products coming to market but to use a simple analogy,
if you need a plumber, you are likely to choose one with experience over a novice. For our part, our team at Liontrust have has been investing sustainably for 21 years and we currently have a team of 17.
3. Knowledge and ongoing training
Sustainable investing is a specialist area and subjects like climate change are fast moving so investors need to be confident their chosen managers have the required knowledge to run money in this way. This can be anything from members of the team having specialist qualifications to a general focus ontraining to ensure people understand the latest sustainability trends. Again, if managers cannot display this, that represents a red flag.
Engagement is a key part of what we call sustainable investing, and we feel managers should be able to highlight a track record of holding companies to account and encouraging them to improve. Managers should be able to talk
in detail about their engagement priorities – whether diversity, tax transparency or plastic pollution – rather than just making sweeping statements. It is also worth looking at managers’ AGM voting records: do they just vote with company management or actually challenge the businesses in which they invest to improve?
To reiterate, the focus should be on how all this knowledge and experience in sustainability is being applied to investment decisions – giving meaningfully different exposure compared to more conventional funds. Are managers able to show how their sustainability views are reflected in their decisions: is it simply ESG data and reporting for the sake of it or actually making a difference to investment? Again, transparency is important here: can managers provide concrete examples where, if you removed the sustainability aspects from a business, they would not have invested in it?
That last point is key and why we have never been too concerned – unlike some of our peers – about exactly how our funds are described. Whether sustainable, ethical ESG, impact or SRI, the key is how much sustainability factors actually impact investment decisions; ultimately, evidence of this over a long period of time is the best protection against greenwashing.
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.