For years the financial services community were slow to adopt sustainable investing principles. ‘Green’ financing was considered niche until late in the 2000s but the past decade saw a boom in popularity, leading to huge proliferation of the number of funds labelled as ‘sustainable’ – but are they, wonders George Latham, managing partner of WHEB Asset Management.
- It’s really hard to tell the investment funds that take sustainability seriously apart from those who use the sustainability label for “greenwashing”
- The UK financial regulator, the Financial Conduct Authority (FCA), is imminently due to announce new investment fund labelling rules, to crack down on greenwashing.
- However, without the ‘radical’ transparency of sustainable-labelled investment funds reporting real-world outcomes, pernicious greenwashing may be here to stay.
Having launched our unique global equity impact strategy almost 20 years ago – back before the UN Sustainable Development Goals were unveiled and the term ‘ESG’ coined – we’re delighted to have led the creation of this market.
However, current fund labelling and reporting requirements are open to manipulation with investment companies divulging the metrics they want you to hear, not the full story. Sadly, greenwashing has become rife in UK financial services.
Worse still, individual investors – you and I, investing via an ISA or self-invested personal pension – are not receiving the same level of transparency and accountability from managers of ‘sustainable’ or ESG-labelled funds as larger, more institutional investors like family offices or large corporate pension funds.
Call for Radical Transparency
If your investment management firm is making ‘sustainable’, ‘ESG’ or ‘impact’ claims about their equity, bond or ETF products to entice you to invest your money as an individual investor, then I passionately believe that you deserve the same level of transparency and accountability as larger or more institutional investors.
It should not be the preserve of the few to receive detailed breakdowns of what your money is invested in and the real-world impact associated with that investment. With the abundance of greenwashing, it’s time for any investment manager labelling a fund as ‘sustainable’ to go beyond mere compliance with the letter of regulation and embrace the spirit of the regulation. Communication should be clear, fair and not misleading.
What we need is more ‘radical transparency’. This should look as follows:
- Publishing all the underlying investments in the fund, not just the top 10 holdings. A recent report found ESG-labelled funds invested over $1.5 billion into fossil fuels; investors should know what their money is invested in.
- Setting out clearly the ‘theory of change’ associated with the fund’s investment strategy and investments, and the process by which the manager expects to achieve positive real-world outcomes.
- Measuring and reporting the real-world impacts associated with the fund’s investments, not just standard reporting of financial performance. This should be done using a respected measuring framework consistent with principles developed by Global Impact Investing Network (GIIN) or the Impact Management Project, and with credible indicators aligned with related UN Sustainable Development Goals.
We believe that any funds that invest in publicly traded securities should embrace radical transparency and demonstrate the ‘real world’ social and environmental impacts of their investments. We do this through the annual publication of our Impact Report and in providing our online ‘impact calculator’, which quantifies the underlying positive impact associated with companies in WHEB’s investment portfolio; the litres of water saved, the tonnes of CO2 emissions saved, the megawatts generated by renewable/clean energy.
This is crucial if investors are to trust that their capital is indeed being allocated to investments that better the environment and tackle climate change or address other sustainability challenges.
Rules to combat greenwashing
Such detailed reporting will soon become a prerequisite as regulators seek to combat the prevalence of greenwashing in public market funds. The UK financial regulator, the FCA, is due to announce new fund labelling rules in the coming months.
These are expected to differentiate between three types of sustainable fund, and require managers to evidence of their real-world impact:
- Sustainable Improvers: The fund manager proactively engages companies in their portfolio to deliver measurable improvements in their sustainability profile.
- Sustainable Focus: Funds invest in companies that meet a credible standard of sustainability.
- Sustainable Impact: Funds invest in companies specifically providing solutions to environmental or social problems, with an explicit objective to achieve a positive, measurable contribution to sustainable outcomes.
It is absolutely crucial investors receive transparent, no-holds-barred assessment of what their fund’s investment manager is achieving in terms of sustainability and environmental impact, alongside investment performance.
Without this – as is currently all too often the case – how can they trust that their capital is indeed being allocated towards achieving better social and environmental outcomes? Sadly, greenwashing has become endemic in UK financial services. If that continues, we all lose, not least the investors.
That’s why we’re urging other change-makers in the fund industry to adopt this level of radical transparency ahead of regulatory demands for it, and to encourage individual investors to dig a little deeper behind each ‘Green’ fund label.
We believe the momentum towards a net zero and sustainable economy is growing. Our goal is for our clients and other stakeholders to be engaged in and excited by our approach to investment and the companies we hold in our fund, and to demonstrate continued leadership in this space.
The opinions of guest authors are their own and do not necessarily represent those of SG Voice.