The lack of universal standards and structure means that there is no gatekeeper to protect against “greenwashing”.
Last week was Good Money Week, which highlighted the rude health of responsible investment in Britain.
There are now more than 120 ethical and sustainable fund products available in the UK alone, and according to figures from the EIRIS Foundation, investments in UK green and ethical funds have jumped from £19 billion in 2018 to more than £23.5 billion now – that’s equivalent in size to the economy of Nepal.
The prospects for further growth are also encouraging. A First State Investment report found that 80% of millennials who don’t already invest in sustainable and responsible products are either “interested” or “very interested”.
Ethical investing is at a crossroads
Despite this demand, many financial advisers and wealth managers lack the necessary information on responsible investment to properly service their clients. What’s more, competition between fund houses to promote their own approaches to “ethical”, “green”, “sustainable” or “impact investing”, to name but a few bits of jargon in the responsible investment industry, is leading to confusion about what’s on offer.
One of the biggest areas of concern is whether so-called ethical and sustainable funds are indeed genuine about positive impacts on society and the environment. The lack of universal standards and structure means that there is no gatekeeper to protect against “greenwashing”.
Consequently, we find ourselves in a precarious time where there is almost no enforcement in place to prevent asset managers from greenwashing. As a result, many investors buying ESG products are now invested in funds that are not quite as sustainable as they think they are.
How can investors be sure ESG products really are socially responsible?
The combination of a knowledge gap and greenwashing has left retail investors vulnerable. This is why new research agency Impact Lens has developed a rigorous research process to rate funds on their sustainability aims and separate the seriously responsible from the more shallow ESG approaches that are talking the talk, but not fully walking the walk.
The Impact Lens methodology incorporates ESG integration, stewardship, and engagement and governance and is reviewed by a panel of responsible investment professionals, academics and leaders of NGOs. This robust and credible approach helps advisers to close the knowledge gap and enables them to match their clients’ values and beliefs with suitable investment products.
To mark Good Money Week, Impact Lens has chosen examples of three funds that demonstrate excellence in responsible investment:
Montanaro Better World for its comprehensive, transparent sustainable investment strategy. Not only does the firm avoid directing capital to industries that are at odds with sustainable development, the fund also seeks to select high-quality companies that make a positive impact on society and engage in sound ESG practices. As part of its commitment to transparency, the positive impact is measured and shared via reports and an “Impact Calculator” on the company website so that clients can see how their money is contributing to sustainable development.
Stewart Investors Asia Pacific Sustainability Fund was chosen for its bottom-up approach to finding opportunities that contribute to human development while being conscious of the need for a sustainable environmental footprint. Potential investment opportunities must undergo a quality assessment, including an assessment of social usefulness and environmental efficiency. Companies that pass the quality criteria are then valued before eligibility for the portfolio is decided. This thorough procedure ensures the firm walks its talk as a responsible investment option.
Rathbone Ethical Bond Fund for its detailed screening process. The fund excludes corporate bonds issued by companies that do not meet certain ethical criteria and also requires that issuers demonstrate environmental and socially positive traits in order to be included in the portfolio. Additionally, with fund managers meeting issuers prior to taking a position, Rathbone utilises an active approach to engagement.
It pays to go green
Just a decade ago, the prevailing view in the finance world was that investors purchasing ethical investment funds would have to accept smaller returns and be willing to leave money on the table. This couldn’t be further from the truth, and as we transition to a low-carbon economy, socially responsible funds are best placed to seek out and capitalise on new opportunities in the green economy while also being safeguarded against major global risk factors such as climate change.
The numbers back this up. Data provider Morningstar found that 34% of sustainable funds appeared in the top quartile of their category in the year to June and about 63% made it into the top half.
It’s a similar story for the three funds that we have selected above. Last year, all three returned more than 6%, outperforming the MSCI World Index. Stewart Investors Asia Pacific Sustainability returned 10.85% in that timeframe and has had a 225% return over 10 years.
The vast number of responsible funds now available provides a huge range of opportunities for potential investors. By making it easier for intermediaries to identify funds that comprehensively consider the environment and society in their investment process, we aim to separate the serious funds from the greenwash.
In doing so, we hope to close the gap between demand for responsible investment and flows into these products and create an overall more robust set of investment options as the market grows.
John Ditchfield is head of responsible investment at Helm Godfrey and co-founder of Impact Lens.