In November, world leaders met at Sharm el-Sheikh for the United Nations Climate Change Conference (COP27). The event brought world leaders and experts together to deal with mankind’s environmental impact on the planet.
While there were some positives, the Guardian reveals that it was widely judged as a failure when it comes to cutting carbon dioxide emissions, with some experts warning that the world is on the brink of climate catastrophe. With this in mind, you might be keen to help tackle climate change by investing in sustainable funds, otherwise known as “Environmental, Social and Governance” (ESG) funds.
If you are, you may not have done so yet because you’re concerned that the funds will not be as environmentally or socially responsible as claimed. Read on to discover three important ways a financial planner can help ensure ESG funds are as sustainable and as ethical as you would want.
First, let’s look at the funds in more detail.
ESG funds help reduce businesses’ impact on the planet
ESG refers to the main three criteria that are used to determine a business’s impact on the planet and society. These are:
- Environmental – how does the business’s operations affect the environment? This might include energy use and whether it deals with waste responsibly.
- Social – how does the company treat its own workers and those within its supply chain? Does it ensure the ethical treatment of suppliers and its staff?
- Governance – is the business run in a way that promotes good practice? For example, is the firm transparent about its accounting methods and does it allow shareholders to vote on key issues?
According to PensionsAge, having investments in ESG funds could be 40 times more effective in tackling climate change than switching to a renewable energy provider, and 20 times more effective than driving an electric car.
Furthermore, responsible investing need not be at the expense of your money’s growth potential. In February 2022, Morningstar revealed that in the previous five years, ESG funds had performed on a par with, or better than, conventional funds.
Always remember that past performance is no guarantee of future performance.
Many investors fear that ESG funds are “greenwashed”
If a company makes unsubstantiated or misleading claims about their sustainable credentials to be in an ESG fund, it’s known as “greenwashing”. A study by Triodos Bank UK suggests that 26% of investors who would not invest in ESG funds, would not do so because they’re concerned about greenwashing.
While it happens, there are authentic ESG funds as well. A financial planner can help you find bona fide ESG funds that expose your money to potential growth in a way that’s in line with your ethics and beliefs.
A financial planner could help you avoid greenwashed funds
As financial planners understand investments, they know what “red flags” to look out for when checking an ESG’s credentials. Let’s look at three ways a planner could help ensure an ESG fund you’re considering is authentic.
1. Check all businesses within the fund
A common mistake when evaluating an ESG fund is not checking all the companies within it. Often, DIY investors only check the companies that make up the fund’s largest holdings.
Checking all the companies that the fund is invested in could reveal industries that are not necessarily environmentally or socially responsible. For example, there may be fossil fuel or fracking companies within it, or other manufacturers that use energy intensive methods and create harmful waste.
2. Look for funds that oversell their ESG credentials
Planners understand that the overuse of words like “ethical”, “sustainable” and “natural” could be a red flag for a greenwashed fund. This is because it could be a way of companies trying to appear greener than they really are.
3. Check for a lack of evidence and vagueness
A financial planner can check whether an ESG fund’s environmental or social credentials can be substantiated by a trustworthy certification. Furthermore, they will look for claims that are vague or poorly defined.
The use of “fuzzy and vague” descriptions can be another warning sign that the investment is trying to look more sustainable than it really is.
Get in touch
As you can see, there are several steps a financial planner could take to help ensure that an ESG fund has not been greenwashed. As they have the time, experience, knowledge and access to experts who can carry out diligent research, they could help you sidestep a fund that doesn’t stand up to scrutiny.
That said, an article by MoneyAge reveals that while 35% of consumers expect their planner to be an expert in ESG investing, the reality could be very different. As ESG funds are complex, it’s important to work with a financial planner who has a good understanding of them, so that you can be sure that your money goes into a bona fide ESG fund.
As this is something we can offer, please get in touch if you would like to discuss ESG funds and how we could help you invest in a way that more closely aligns with your ethics and beliefs. You can contact us on info@janesmithfinancial.com or call 01234 713131.
Please note
This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation that is subject to change.
Always remember that the value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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