Investors should be wary of greenwashing when making ESG investments, says Bancroft Wealth
Following many years of increasing demand for ethical investments, flat-fee wealth manager Bancroft Wealth is warning investors to look beyond the labels and marketing messages when choosing where to place their money if they want both ROI and ROP (return on investment and return on principles).
The GBP500 a year, flat-fee wealth manager has had more clients seeking to invest in ESG funds as people become more aware of environmental and social issues, and because these funds have generally been performing well in the last few years.
Keir Ashman, pensions and investments specialist at Bancroft Wealth, says: "ESG funds are no longer the preserve of the most moral-minded investors, and due to their performance over recent years have been attractive for anyone looking to maximise their financial growth.
“And where there’s an increase in demand a flurry of supply is sure to follow, and asset managers have been launching new ESG options left, right and centre. But what is ESG? The term - and the ‘ethical’ focus that underpins it - means different things to different people, so the label can be abused. After all, it’s easier, quicker and cheaper to label something as ‘ESG’ than to build something, with the right measures in place, that is truly ethical and sustainable.
“When you look under the bonnet, a lot of so-called ethical funds look very similar to other funds, so there is a real risk that much of the time it is simply a branding exercise. As investors - and consumers more generally - become ever more sceptical of ‘greenwashing’, fund managers are going to have to find ways to build trust with socially-conscious investors.”
Ashman adds: “Basing a fund on a clear philosophy, with transparent reporting of not just its financial growth but also the progress being made against environmental or societal improvements, will likely become the new norm. Simply sticking ‘ethical’ on a factsheet won’t cut it anymore. As the market for ESG investing becomes more competitive, the genuine ones will rise to the top.”
How can people see past the ‘greenwash’ - the words used by funds and companies promoting their ESG credentials - to understand the true intent? Bancroft Wealth provides the following tips to help people see through the ‘ethical veneer’:
• Look for the use of independent sustainability ratings, such as Vigeo, Sustainanytics, FTSE Russell, and DowJones Sustainability.
• Understand the philosophy that underpins the fund or portfolio. How are companies chosen and funds picked? What are the asset managers trying to achieve in the long-term? Do they have a strong track record in this area? This should be clear in the literature they supply.
• Watch out for portfolios that have simply been tweaked from an existing portfolio rather than built from scratch, as this indicates they have been speedily built to meet consumer demand rather than being based on genuine philosophy.
• Review the way asset managers report on the performance of funds. For example, do they monitor the extent to which they have addressed sustainability challenges rather than just reporting on growth?
• Ask if they are willing to be transparent about the makeup of their fund or portfolio, or do they just give the names of the top contributors?
"This may sound complicated, and it does require more work than simply picking an investment option with an appealing label, but it’s easier than it sounds when working with a qualified and unbiased adviser that can make sure your wealth goals are supported by the right investment choices.”