ESG investments and how to spot greenwashing

May 2022
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You may have read February’s article that gave an overview of ESG investing and highlighted the rise in interest in ESG investing in recent years. 

The dramatic increase in popularity of such investments in recent years has led to a subsequent rise in a practice known as “greenwashing”.

Read about what greenwashing is and how you can spot it when you’re building your investment portfolio. 

The growth in ESG investing

The desire to invest in companies or funds in a way that matches your own beliefs and principles is not a new one. For example, in the US during the 1960s, there was a big campaign against investing in companies that activists believed were profiting from the Vietnam war.

With the rise in climate change activism, as well as concern about human rights in different parts of the world, ethical and sustainable investing has come under the broad heading of Environmental, Social and Governance – that you’ve probably seen referred to as ESG.
The growing number of people taking non-financial factors into account as part of their investment decision-making has led to an extraordinary rise in ESG investing. 

In fact, according to Bloomberg, in 2021 ESG investments totalled $2.7 trillion (around £2.2 trillion) – a rise of 53% from the previous year, as shown in the chart below. 

Source: Bloomberg from Morningstar Inc.

What is greenwashing?

The growth of ESG investment has inevitably led to companies and funds trying to clamber aboard the ESG bandwagon and attract investor money by highlighting their own ESG credentials.
Often, some companies will give a false impression of their ethical and social policies or provide misleading information about how environmentally friendly they are.
Such action, which can mislead potential investors, is known as greenwashing.
If you want your investments to reflect your ethical beliefs, greenwashing can make it difficult to understand whether a certain investment truly fits your personal criteria.
For example, in February 2022, a scientific study, reported in The Guardian, revealed that the incidence of references to “climate change” in BP’s annual reports increased from 22 to 326 over a ten-year period. Despite this, the study concluded that companies, including BP, were making pledges to transition to clean energy and setting targets, rather than taking action.

Investors want more transparency on ESG credentials 

In their annual institutional investor survey, leading international investment managers, Schroders’, revealed that greenwashing was one of the biggest challenges investors face.

For the second consecutive year, almost six in ten investors globally were worried due to a lack of clear, agreed definitions of what sustainable investment is.

Separate research from Triodos Bank* backed up Schroders’ findings. In 2020, 17% of investors were concerned that companies may well be hiding their ethical credentials to attract investor money. A year later that figure had risen to 26%.

The financial regulator has expressed concerns over greenwashing

With confusion over the true credentials of companies and funds, greenwashing can be a worry.
The Financial Conduct Authority expressed its concerns about the practice in a letter to investment fund management companies last year. 

The letter contained a strong warning over industry attempts at greenwashing and confirmed that they are planning to introduce measures to regulate firms providing sustainability data and regulations.
At the time they issued their letter, the FCA intimated that they would publish a full report by the spring of 2022. Until their report is released, investors will need to consider whether greenwashing could be affecting their choices.

Research can help you spot greenwashing

Concern over how your money is invested is understandable.
One of the best ways to address such concerns is by carrying out your own research into the ESG credentials of companies, or funds, you’re looking to invest in.

A good starting point when it comes to investing in individual companies is their sustainability report – or the section in their most recent annual report covering this heading.
You can also do a wider search for other information and look at one or more of the websites set up by ESG activists to guide investors.

You’ll no doubt have your own criteria when it comes to what is and isn’t acceptable from an ESG perspective.
Be aware, however, that reviewing online content isn’t necessarily a fail-safe way to ensure you’re investing in companies with strong green credentials. 

Greenwashing can mean such companies overpromising on certain projects or downplaying the effects of some of their activities. But research like this – and double-checking with reputable sources – can give you some insight into the ethos of a company.

Investment companies can greenwash too

Many leading investment companies now offer a range of ESG funds for ethically conscious investors to choose from. 

However, there’s no set definition of what ESG actually means in relation to a certain fund.

In theory, the lack of regulation means an investment company could label a fund “ESG” and challenge investors to prove otherwise. 

In reality, the negative publicity makes such a move unlikely, but it does illustrate the importance of independent research and due diligence when it comes to where you invest your pension fund and other savings.
For example, a report in FT Adviser recently confirmed that leading investment analysts, Morningstar, have removed 1,200 funds from a “sustainable” list, demonstrating that ESG fund criteria can change quickly and constantly be open to challenge. 

Fund managers are obliged to publish a detailed fund fact sheet that will list the top ten holdings of that particular fund. Then you can drill down into the details of each company as outlined in the section above.
Although the top ten holdings will not account for the entire fund, it will give you a clear idea of its ESG credentials. You’ll need more research to study all the holdings of a particular fund.
Get advice

As you can imagine, the sort of research outlined above can be tedious and time-consuming.  Company annual reports can run to hundreds of pages and, as you’ve already read, their deeds might not match their words. 

If you’re looking to balance your ESG objectives alongside your attitude to investment risk and your long-term investment aims, we recommend you get expert investment advice.

ESG portfolios through our funds
We have a variety of LEBC Governed Portfolios, covering different risk profiles and time frames. These include five bespoke ESG portfolios.
We will work with you to identify the most appropriate one for your investment needs after completing an in-depth risk analysis and gaining more insight into your values and beliefs.
Get in touch
To find out more about ESG investments and our LEBC Governed Portfolios, please get in touch. Email or call us on 0800 055 6585.

The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not indicative of future performance.


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