Greenwash: 3 questions to ask BEFORE you invest

Written by Lori Campbell on 18th Oct 2023

This article is from the Good Guide to First-Time Investing, which you can download for free here.

There’s no doubt that the world has shifted in the last few years. A global pandemic, the Russian invasion of Ukraine, and worsening wildfires and flooding caused by climate change have focused minds when it comes to responsible investing. 

What was once the preserve of ‘tree-hugging hippies’ has thankfully now gone mainstream. It needed to. 

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. 

Hiding behind a name

The proliferation of different terms and jargon has allowed some companies to hide behind a name, disguising what’s really going on with these funds and in which sectors and companies they are being invested. 

Luckily, the powers that be have cottoned on to increasing greenwash. The Financial Conduct Authority (FCA) is set to bring in tough new rules to crack down on the greenwashing of investment products. 

The raft of new measures includes a new set of consumer-friendly ‘sustainability labels’ on investment products and tighter restrictions on how terms such as “ESG” (environmental, social and governance issues), “green” and “sustainable” can be used. 

Change is coming

FCA Director of ESG Sacha Sadan said: “Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges.” 

How to invest for positive impact

While this is encouraging, it’s always worth doing a little homework yourself. 

Three questions to ask BEFORE you invest: 

1. 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? 

2. 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? 

3. 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.

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