ANYONE who wants to put their pension or savings to work for the good of humankind must have been concerned by recent allegations of “greenwashing” in the financial services.
In June, the Financial Times reported that “an industry-wide mis-selling scandal may be brewing,” after senior executives at two of the world’s largest asset-management companies blew the whistle. Desiree Fixler, the group sustainability officer at DWS, a German asset-management company, said last year that the company was overstating its credentials on sustainable investment. A few weeks later, the chief investment officer for sustainable investing at the British-based asset-management firm BlackRock, Tariq Fancy, said that investing in funds screened according to Environmental, Social and Governance (ESG) criteria was little more than “marketing hype”.
The head of responsible investment policy and research at EdenTree Investment Management, Neville White, says that the recent surge in enthusiasm for sustainable finance has resulted in “lots of new entrants coming into the market who want a slice of what is potentially a very large pie. We’ve seen a lot of relabelling, so that a corporate bond fund, for instance, just becomes a ‘sustainable corporate bond fund’.”
“People have been talking about greenwashing for a long time,” the chief executive of the UK Sustainable Investment and Finance Association (UKSIF), James Alexander, says, “and that has led to a serious erosion of trust. Some of it has been inadvertent — I’m not saying that everyone is out to deceive people — but marketing departments, and others, have incentives to say that things are better than they maybe are.
“There’s also the question: Is it greenwashing if you are doing something good, but not doing it fast enough?”
Abigail Sater, the chief executive of the Big Exchange, an initiative of the Big Issue which enables people with as little as £100 to invest to do something beneficial with it, says: “I’d like to think that no one is intentionally misbranding their products. If you’re sold something that says it’s going to do some good for the world, you want it to do what it says on the tin.”
Part of the problem is the widespread confusion over what the different words “on the tin” mean. There are no legal definitions or standards, the founder of Economy of Good, Charlene Cranny, says.
Many new players have misunderstood ESG, she says. “That’s where the big battle is going on now. They’ve seen it as the new overarching term for all the good stuff — ethical, sustainable, and impact investment — which is wrong.
“‘ESG integration’ is a very specific approach that takes into account only factors that might have an impact on a company’s bottom line. It doesn’t care what the company does, or what impact it has on the world.” At most, she says, ESG “encourages bad companies to be less bad.
“For example, a tobacco company could have a high ESG score, even though its product still kills people, because it’s conserving water and energy — and that’s reducing its costs.”
In reality, she says, whereas “ESG-integrated” funds account for almost half of all assets under management in the UK, investments focused on sustainability and positive impact amount to only three per cent. The sector is still “very niche”.
The head of sustainability at CCLA Investment Management, Dr James Corah, observes that ESG considers how climate change may affect the valuation of an asset, but “it’s not doing what [conscientious investors] would want, which is to use their money to try to stop climate change happening.”
“ETHICAL” investment is, by and large, defined in terms of “Thou shalt not”, Mr White says: the avoidance of gambling, pornography, arms, and, increasingly, fossil fuels. “Much of the market still has some — or all — of those exclusions in place,” he says, “but I think the term is going out of fashion.”
istock Getting behind the language of how a stock or fund is marketed, with a fund manager or financial adviser, is essential
He sees some evidence of greenwashing here, with the impact of what he describes as “moral panics”. “For example, we saw a lot of commentary that [the defence industry] is now ethically acceptable because of Ukraine. In my view, it isn’t, because every defence company sells across the arms trade.”
There is no accepted definition of “sustainability”, Mr White says. “For us at EdenTree, it’s very much a thematic type of investment: around education, health and well-being, social infrastructure, and sustainable solutions.”
Mr Alexander sees it quite differently. “What we think about is: Can you keep going indefinitely doing business the way you’re currently doing it? If not, do we need to change your business in order to make it more sustainable? A company whose business model depends on being able to burn fossil fuels will sooner or later not be able to keep doing that, so that would be an unsustainable model.”
“Impact” investment, Mr White says, goes a step further and looks for a measurable social or environmental impact. “That’s quite difficult to achieve [on the stock market]; so it’s really about green bonds, social bonds, charity bonds, where the whole instrument is geared towards delivering some kind of impact.”
Ms Cranny believes that, in the UK, “impact” may soon be defined by regulators as anything that makes a positive contribution. “So, if you are successfully transitioning a company to some sort of better business model, producing better products or decarbonising, that would be seen as ‘impact’ as well.”
Obviously, no company is without faults. “Real life is not like a movie, where it’s clear who the good guy is and who’s the bad guy,” Mr Alexander says.
“When you try to assess the entire impact a company has — on the environment, the climate, water, air, other people, other species, not to mention its supply chain and everyone it does business with — it is extraordinarily difficult, even for people who do this professionally.”
The idea of creating “a pure portfolio” in a fallen world, Dr Corah says, “is an absolute fantasy. You might think it would be great to build a portfolio entirely of wind farms, but where are the components for their turbines being made? What are the labour standards like?”
In any case, “when you buy shares in a wind farm [on the stock market], you’re not giving that company more money to go and do more good stuff: you’re just buying the shares off someone else. So, building a portfolio of good [projects] is a good way of signalling your values, but it’s not necessarily having the impact you might think.”
“I THINK you’ve just got to give people the information to make decisions based on what they’re passionate about,” Miss Sater says. To that end, the Big Exchange does a full impact assessment of the funds it puts on its platform.
“We get under the bonnet of these funds, we look at the companies they’re investing in, we look at what’s driving their revenues, we look at what the fund manager’s doing to engage with their management, and we award them gold, silver, or bronze, depending on how well they do on our test. If they don’t make the grade, they don’t get a medal, and they don’t get on to the site.
“We can then say to customers: ‘These are the controversies in this fund. For example, although it’s got silver, it does invest in companies that do animal testing. If that’s something that you’re really passionate against, you might not want to invest in this one.”
Dr Corah says: “You want to avoid investing in the worst kind of companies, and in the companies our clients have identified as those that most clearly contradict their values. But the next question is: how can we have the best added value?
“For me, the best added value is not necessarily investing only in the best companies — the ones that have the best track record, the best decarbonisation plan, the best approach to labour standards — because, frankly, by just investing in those we’re not going to deliver any change.
“What is going to deliver change is saying: ‘This business is not perfect in any way, shape, or form, but we have a team with the expertise to talk to the management and genuinely drive it forward.
“Of course, there are lines you won’t cross, but the real way we should be measuring companies and the impact we’re having is: Are they responding to our engagement with them?”
For example, Dr Corah says, CCLA has done “a huge amount of work” on modern slavery. “Some people would say, ‘I don’t want to invest in a company that has slavery in its supply chain,’ but we think that every single business does, because slavery is so pervasive. When you survey companies confidentially, 70 to 80 per cent of them say that it’s there.
“For us, the way to deal with this issue is not to say we’re not going to invest in anyone who has found it in their supply chain. What we’re going to do is talk to management and get them to look for it, and, when they have found it, begin to provide solutions for the people who’ve been impacted by it.”
Engagement is crucial. The best strategy, Mr Alexander suggests, “is not necessarily to invest in those companies that are already doing good stuff — there’s loads of money queuing up for them. The most important thing is that investors use the levers they have — because as a shareholder you are a co-owner — to help to push companies in the right direction.”
“This, for me, is how we cut through all the greenwash,” Dr Corah says. “Can we simply say that our investment in the company and the conversations we’ve had with management have led to them being a more responsible global corporate citizen? Has it improved lives? Has it moved them forward on their climate journey?
“We’re not quite sure yet how to report on that, but that’s where we’ve got to get to.”
Ms Cranny observes that pension funds in particular have power, because they are investing huge amounts of money, and over the long term. “What I would want to see from any fund that says that they’re invested to make a difference is deadlines,” she says. “I’d want to know what they’re asking companies to do, and by when. It’s not about getting a report on [carbon] emissions; I’d want to see a report on how they are reducing emissions.”
HOW, then, should investors who are anxious to avoid greenwash proceed? “If I was looking for a fund to invest in,” Mr Alexander says, “I’d be asking: ‘What is your approach to investor engagement and active ownership? A key thing to remember is that you’re not buying a product, you’re buying a service, and therefore you need to be clear about the approach of the firm that is managing your money — the way they think and the way they operate.”
Dr Corah concurs. “What matters is not so much what’s in the portfolio, as the culture of the firm that manages it. What do they stand for? What have they achieved? How do they think they are going to make the world better, and how are they going to measure that?”
istock In building a portfolio of good, remember that, on the secondary market, where shares change hands, there is no added benefit to whatever green project your shares are in
The investment manager at Liontrust Asset Management, Mike Appleby, says that the manager of a genuinely sustainable fund should be transparent about how they invest, and open to challenge. They should be able to provide a full list of all the companies that the fund is invested in rather than just “the standard top ten”. They should respond to queries about the companies, and be ready to explain why they like them.
Sustainable investing is a specialist area, he says, and issues such as climate change develop fast; so a good fund manager should be able to display the necessary knowledge to invest wisely.
They should also be able to demonstrate a track record of holding companies to account and encouraging them to improve, and should be able to talk in detail about their engagement priorities, “rather than just making sweeping statements”. It is also worth looking at their voting records at AGMs: do they challenge the companies they invest in to improve?
Finally, they should be able to show how their views on sustainability are reflected in their investment decisions.
Mr Alexander suggests asking your financial adviser, if you have one: “‘What are you doing to make sure that my money is invested sustainably, whether it’s my pension, my savings, or whatever?’ The more people ask this question, the more advisers and others are going to be thinking about it as a normal part of daily business.”
Ms Cranny recommends Tumelo, an “impact-focused” financial technology firm that has designed a “plug-in” that enables members of the public to cast a vote on important issues relating to companies that their pension contributions are invested in. Quite a few pension providers, she says, have incorporated it into their websites.
Tulipshare is another new platform that invites you to invest as little as £1 in company stocks to add your weight to that of other like-minded investors in campaigns to promote ethical change.
“If you don’t want to do the spadework yourself,” Ms Cranny advises, “the next best thing is to get some opinions from people who really understand the sector.” Useful websites include “‘Good with Money’ — which has a ‘good guide to pensions’, a ‘good guide to ISAs’, and so on — and ‘Ethical Consumer’.”
There are certainly reasons to be hopeful. The good news is that “people are looking to learn — both financial advisers and clients,” Ms Cranny says. “And the financial advisers who do know what they’re talking about when it comes to the good stuff, are doing more webinars and events, showing that good advice is available.”
Mr Alexander says: “Every major company in the world now has investment firms knocking on their door, asking them how they are becoming more sustainable, not least because every major investment firm in the world has its investors — whether it’s pension funds or individuals — knocking on their door asking how their money is being managed sustainably. The whole system is moving forward, with regulators getting in there and governments getting in on it.
“Without a shadow of a doubt, this industry is having a positive impact. The question is: are we having an impact fast enough?”
edentreeim.com
uksif.org
bigexchange.com
economyofgood.co
ccla.co.uk
liontrust.co.uk
tumelo.com/personal
tulipshare.com
good-with-money.com
ethicalconsumer.org
Avoiding greenwash
THE website Economy of Good offers six tips for avoiding greenwash in placing pensions and investments:
- Scrutinise their language.
- Look at how many of the options they offer are geared towards “sustainability” or “impact”. That will give you a sense of how seriously they take limiting harmful investments.
- Ask for a list of every company the fund, pension, or platform invests in, not just the top ten.
- Ask how they prove that they have a positive impact. What’s the evidence?
- Ask for their record on engaging with companies and voting at AGMs, including whether they actively submit their own proposals to make a difference. ShareAction reports on the voting records of some of the biggest investment firms.
- See what the firm (or fund) talks about most, to assess whether its primary concerns match yours.