Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The increased focus on sustainability and Environmental, Social and Governance (ESG) factors is a step in the right direction. It’s helping to direct capital towards the funds and companies with a sustainable focus, holding to account those which neglect responsibility for their practices, and helping to make sure the investment industry as a whole makes a positive contribution to society.
One area of focus right now is how companies are facing challenges posed by climate change. A whole host of companies are committing to meet those challenges head on, with many pledging to achieve ‘net zero’ carbon emissions within the next few decades.
While all this is broadly good, there’s a danger here too. As scrutiny ramps up, so does the incentive for companies and funds to promote their green credentials. That’s leading some to exaggerate what they are doing, either to appeal to investors or appease regulators. This process is known as ‘greenwashing’.
Greenwashing is not only a worrying trend in principle. It also poses a serious challenge to investors.
Why greenwashing matters
Greenwashing will usually occur in one of two ways. Either a fund management team claims to be conducting extra, non-financial, ESG analysis of prospective investee companies which actually does little to constrain their approach. Or they will invest in companies which they claim have a positive impact, but don’t in reality.
This can cause a range of problems. On the one hand, companies or funds that are found guilty of greenwashing could face regulatory punishment and reputational damage. That poses a very real financial risk to investors. We’ve seen recently with Boohoo in the UK and Wirecard in Germany how damaging an ESG scandal can be.
The second, more subtle, issue is for investors who believe they’re using their money for good by investing it in a fund with supposedly strong ESG credentials, when in fact the fund is exaggerating those credentials. The risk here is not necessarily financial - the fund could in theory do this without anyone noticing - but it’s clearly a bad outcome for the investor.
Similarly, many funds are technically able to use a ‘green’ or ‘sustainable’ label because they hold a certain quota of their portfolio in the right companies but, because of the fund’s own diversification or liquidity rules, can also hold other companies that an ordinary investor might not consider to be really green. This may not be considered greenwashing in a regulatory sense, but the effect on the investor is much the same.
Investors can confront both problems in similar ways, as outlined below. But the point to remember here is that ESG investing is often a subjective thing. What’s important to one investor may not be important to another. Some will take certain issues more seriously than others.
That means that it’s important for individual investors to do their own due diligence, to make sure their investments chime with their beliefs.
What to look for
Let’s start with how you can check up on the funds you already own.
Check out the fund house’s website. Here, you should be able to find a good amount of information that backs up their claims. Many houses will produce reports or articles detailing their sustainability policies.
Be sceptical. Greenwashing can sometimes be as simple as clever marketing. If a fund house is using lots of jargon or nice-sounding phrases with little substance behind them, you’d be right to question their seriousness. What you’re really looking for is evidence of either the process the fund house uses, or the positive impact it has.
There may be information on individual funds. Ones with genuinely strong sustainability credentials will usually provide evidence of the ESG measures they take, often listed in strategy documents or updates.
Third-party endorsements can help as well. If a fund demonstrates particularly strong ESG credentials, it may be recognised by the wider industry. Third-party ratings, like those provided by MSCI and Sustainalytics, can also be useful, though it’s best not to rely on these alone. As ever, your own due diligence will serve you best.
If you’re looking for funds that you can trust going forward, it’s a good idea to look at ones that were thinking sustainably before it became cool. There are plenty of fund houses that have established long and well-respected track records for sustainable investing.
One good example is Stewart Investors. When we spoke to David Gait, manager of the Stewart Investors Asia Pacific Leaders Sustainability Fund, he explained how sustainability had been at the core of his investment approach ever since he began managing the fund in 2005.
Much of what Gait says is backed up in Stewart Investors’ own resources, which can be found on its website. Rather than speaking in generic terms about ESG, houses like Stewart Investors illustrate their philosophy with evidence of what they do and the benefit it’s had. You can watch our interview with David here.
Brown Advisory is another good example. Like Stewart Investors, it was interested in sustainability before most. Its policy is very transparent, and it provides periodic reports detailing its sustainability approach. When we spoke with David Powell, co-manager of the Brown Advisory US Sustainable Growth fund along with Karina Funk, the company’s credibility was clear.
A final option is Rathbones. This company has built a near-30-year track record for ESG investing, over which time it’s been well recognised by the industry for its practices and contribution to sustainable investing.
As ESG investing gathers momentum, greenwashing is likely to follow close behind.
Some fund houses and companies will run into trouble. Many others will toe a line which allows them to promote their sustainability credentials, even if they fall short of many investors’
expectations. That’s why doing your own due diligence is key. After all, sustainability means different things to different people.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. The Stewart Investors Asia Pacific Leaders Sustainability Fund invests in emerging markets which can be more volatile than more developed markets. The Fund may also use derivatives to reduce risk or to manage the Fund more efficiently. The Brown Advisory US Sustainable Growth Fund and the Stewart Investors Asia Pacific Leaders Sustainability Fund invest in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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