Sustainable investing is both an art and a science… and it’s always been open to deception. Its increased popularity hasn’t come without its challenges – and one of the main concerns is greenwashing.  

    ‘Greenwash’ is defined by the Cambridge Dictionary as “to make people believe that your company is doing more to protect the environment than it really is”.  

    Greenwashing isn’t just seen within our profession, but anywhere there’s a claim for a business to operate in a sustainable way. We’re seeing exponential growth of ‘sustainable’ options in every sector; whether in toilet roll production, the fashion industry or financial services.  

    While opinions on what’s classed as greenwashing may differ, it’s undeniably having a detrimental impact on the credibility of many investments. Within financial services, this is driven by a combination of lack of understanding, but also intentional mis-selling to benefit and profit from the surging demand for ethical investments.

    There is much jargon and many abbreviations in financial services, and sustainable investing is no exception. ESG, SRI, thematic, impact, ethical, green… these are all terms used on a regular basis and often without an understanding of the rationale or meaning behind them.  

    A lack of a clear definition leaves the sector open to misinformation and exploitation, and as a result, advisers and their clients are often dubious. This not only threatens credibility, but also the movement towards a more sustainable future where companies who aren’t operating in a responsible and sustainable way are being supported by false claims.  

    This must change.  

    FCA intervention

    On the 19 July 2021, a letter to the chairs of authorised fund managers was published by the FCA.  

    The letter lays out their expectations on the delivery, disclosure and design of ESG and sustainable investment funds, along with ‘specific guidance on how to apply its existing rules in an ESG context’.  

    There is a clear symbiosis between this and the results of the FCA’s ‘Consumer Study on Sustainable Investing: Objective gradings, Greenwashing and Consumer choice’ and resonates with commitments made in the FCA’s 2021-2022 Business Plan relating to ESG.  

    For the avoidance of doubt, eliminating greenwash will not be a quick or easy fix. The FCA’s input will contribute to the future reduction of instances of greenwashing, however we can all take steps to protect ourselves until it does.

    How to avoid it until it does?

    Over $542 billion was invested into ‘ESG-focused’ funds worldwide during 2020. In the same year 256 funds applied to the FCA to rebrand and to add sustainable or green into the fund name. It’s clear that you can't rely on a fund name or terminology to assess the nature and focus of a fund.   

    Due to a lack of sector consensus about what can be defined as a sustainable investment (and measurable data to assess), until we see increased transparency, disclosure and honesty, a higher level of due diligence is required. The absence of standardised disclosure makes it hard to determine a fund’s true ESG credentials and the lack of consistency across ratings agencies further obscures the research process.

    Investment managers will also need to interpret the available data. It’s key to have expertise within the fund house to look at not only the attractiveness, but also the robustness of company’s business model. This is crucial to success.  

    As advisers you could consider adding some additional questions to your conversations with investment providers. This is not an exhaustive list, but collectively they dig into a firm’s policy and strategy in relation to responsible investment, and help you evidence to clients that these are embedded into investment, processes, portfolio management, and governance.

    • Have you signed up to the Principles for Responsible Investment (PRI), and if so, can I see a copy of your most recent assessment report?
    • Have you signed up to the UK Stewardship Code 2020? Are you a member of any other ESG related organisations?
    • Do you have any policies that outline how to incorporate Environmental, Social and Governance (ESG) issues into the investment decision making process? How do you monitor and evaluate compliance with the policy?
    • Do you have any voting and exclusion policies? Do you publish details of your voting track record? If it’s not available, why is this?
    • Do you have an engagement policy? What issues do you typically engage on, and can you provide examples?
    • What ESG data or research do you currently use? Do you have a specialist in-house team, or is it brought in by a specialist third party?

    Providers that offer responsible and sustainable investments can also be a fantastic source of information for you to increase your knowledge and awareness in the ESG space.  

    Look through the facade to discover the true intentions of any investment you are considering. 

    The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest.  

    References

    https://dictionary.cambridge.org/dictionary/english/greenwash

    Start the discussion

    Add a comment