Watching out for greenwash

Choosing where you invest – such as your pension – is a powerful way to support change in the world, but how do you avoid ‘greenwash’?

When we started Investing Ethically, back in 2001, investors had access to only a small number of ethical funds.  More than two decades later, it’s a very different situation – with hundreds of funds now making claims to be sustainable, ethical, green, responsible…

As an example of confusing language, the term “ESG” currently gets a lot of attention.  ESG focuses on companies’ management of environmental, social and governance issues – such as pollution, health-and-safety, or corruption.  These are clearly important matters and companies that look after such concerns can, for example, avoid fines from contaminating land; or manage risks such as water shortages; or take advantage of new business opportunities such as clean energy.  These are positive things.

However – in our experience – ESG only scratches the surface when it comes to ethics and values.  Primarily, it’s about business risk and performance, not about rights or wrongs.  You’ll find tobacco, armaments, and fossil-fuel companies that manage their ESG – publishing annual reports about their positive environmental and social impacts, such as protecting biodiversity or providing apprenticeships.

There are real concerns about companies and funds self-proclaiming their ESG credentials, when they actually have a relatively poor performance record on such matters!

So, it’s good news that the Financial Conduct Authority (FCA) is introducing new rules in this area – the Sustainability Disclosure Requirements (SDR).  There is a new “anti-greenwashing” rule, that will apply to all FCA-regulated firms, which requires that any sustainability claims need to be “clear, fair, and not misleading”.

There are also a series of measures that will apply to fund managers, including four new sustainability labels – Impact, Focus, Improver and Mixed-Goals.

Funds using one of these sustainability labels must meet certain rules, including:

• having a clear, specific and measurable sustainability objective
• using robust sustainability standards when selecting companies to invest in
• publishing information about their sustainability performance

The anti-greenwashing rule comes into force at the end of May, with additional regulations added over 2024 and 2025.  Things will become clearer over time, as the new rules begin to be enforced, but we can see there are potential areas for concern.  For example, to qualify for a label, only 70% of a fund’s assets needs to be invested in accordance with its sustainability objective, which raises questions about what the remaining 30% might be invested in.  Similarly, the ‘Sustainability Improver’ label is about investing in companies that have the potential, over time, to improve their environmental or social sustainability.  So funds with this label could include, for example, fast-food or mining companies… and would fail to meet the expectations of most of our Investing Ethically clients!

The first labels can be used from the end of July this year – and we will start to include them in the information we share with our clients.  Liontrust, for example, intend to classify all of their existing Sustainable Future funds, and their Liontrust UK Ethical Fund, using the new Sustainability Focus label.  Edentree intend to apply a combination of the Sustainability Focus and Sustainability Impact labels, plus the Mixed Goals label for their multi-asset funds.

We’ll obviously be monitoring this very closely here at Investing Ethically.  The new SDR regulations – the labels and the published information that goes with them – will certainly be helpful.  That said, there are concerns – and it’s always been our approach to work closely, and in person, with the ethical fund managers.  We aim to really get “under the bonnet” of the funds, and to scrutinise what they’re doing – on behalf of our clients.  This is very much how we plan to continue.

Damage to the natural world – including deforestation – is a major concern for many ethical investors.