Greenwashing. It is a term used in the industry that is sure to make compliance departments itch, but something that it growing increasingly problematic for investors.
The wave of money into ethical investments, typically labelled environmental, social and governance (ESG), has caused many fund houses to quickly change course.
This has mainly been done in three ways: launching new ESG funds, changing the mandate on existing funds, or using these ‘principles’ but not labelling themselves as ethical warriors. It is the last case where you might find funds buying all sorts of typically ‘bad’ stocks.
Of course there are also various different definitions of what an ESG fund should be. Should it invest in the people making breakthroughs, or should it simply just avoid the worst companies? Indeed, should it instead buy the worst carbon emitters but attempt to get them to change their ways? All could be labelled ESG but have very different ways of investing.
Step in the Financial Conduct Authority (FCA), which this week closed its consultation on sustainable fund marketing and anti-greenwashing measures.
Its proposal would lump funds into three categories: those with a sustainable focus; the sustainable improvers; and finally those creating a sustainable impact.
It is a welcome move for a part of the industry that clearly needs some guidance. Indeed, Chris Cummings, chief executive of the Investment Association, said: “Our industry recognises that we must continue to raise standards and improve consumer confidence in this area of the market.”
The bare minimum hope is that the clear labelling system will give investors somewhere to start, although Cummings said the current proposed framework is “too prescriptive” and “would exclude many existing funds, which are being sold legitimately to satisfied customers on the basis of a strategy related to responsible or sustainable investment”.
Not all agreed. Edina Molnar, vice president in Redington’s investment consulting team, said the change was welcome, but suggested that given the “inconsistency in the quality of some sustainability data” that the FCA requires firms to get external verification on whether they are an ESG fund or not.
One thing is clear: there is no perfect solution. Cummings said he wanted the FCA to more away from prescriptive language to incorporate all funds, even the ones investing in ‘bad’ companies – as long as they are doing so for the right reason.
This kind of nuance is incredibly difficult to account for, however, and will unlikely be included in a broad-brush approach.
It is at times like this when one has to wonder how on earth everyday investors such as myself are supposed to make head nor tail of the industry.
Even the FCA is being asked to be more precise, while also more lenient, by two different people in the industry: both of which provided feedback to this paper.
It is a thankless task sorting out this mess, but one that needs to be done correctly if retail investors stand a chance of picking appropriate portfolios without having the wool pulled over their eyes.
For my tuppence, I would make funds have to disclose their holdings every six months alongside an ESG score and rationale as to why they invested in a company – particularly the poor scorers.
At least then investors have somewhere to look at when making an informed choice – if this is something that is of utmost importance to them. And you never know, it might be enough regulation to put some of those businesses accused of greenwashing off from claiming to be ESG anymore.