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How to invest in sustainable companies and avoid the greenwashing trap

Images of flooding across Europe, the California wildfires and Hurricane Ida this summer have focused minds when it comes to climate change and responsible investments.

ESG – which stands for environmental, social, and governance – has become a buzzword and many funds screen out sin stocks in the tobacco, alcohol, gambling and pornography industries.  

But this focus on ‘avoid’ rather than ‘advance’ has led to an influx of what are essentially tech funds packaged up as a responsible investing alternative.

Climate change: Plenty of so-called sustainable funds are investing in companies that have little impact 

There are nevertheless ample opportunities to invest in companies taking a proactive approach whether it be in agriculture, energy or healthcare.

We look at how to work out whether the fund you’re investing in is as green or sustainable as it’s  made out to be, and what is out there for investors looking to home in specific sectors having a tangible impact.

Are funds just paying lip service to ESG investing?

One of the biggest problems for investors when it comes to ‘ethical’ funds is the rapid evolution of the term over the period of a few years.

The focus on a company’s impact has in the past typically come from faith group preferences, with exclusions of weapons, alcohol and tobacco.

That has since morphed into ethics being defined by ESG, which means holdings in older ethical funds do not match up and are largely out of sync with what investors want, as they still operate on an exclusionary basis rather than a proactive sustainable one.

Former SJP director David MacDonald launched Path Financial in 2019

Former SJP director David MacDonald launched Path Financial in 2019 

Added to this is the lack of an industry standard measurement tool which makes labelling funds even more difficult.

‘We don’t have the measurement tools on E, S or G to measure what’s going on. I call it the 50 shades of green question. How green is green? It depends on your definition,’ says David MacDonald, a former St James’s Place partner who launched ethical financial planner Path Financial in 2019.

He adds: ‘What you might see as a thematic tilt might actually not be. Apple is a classic example of this. The reason for including it [in ESG funds] is because the technology enables less carbon than would be there if FaceTime didn’t exist. 

‘On the other hand, you might say it’s a manufacturing company hauling a lot of stuff out of the ground to make batteries and they’ve got built-in obsolescence.’

Duncan Grierson, founder of impact investment app Clim8, says: ‘There are many funds that have been badged or rebadged as ESG and in fact they are just investing in Microsoft and Facebook, and that’s having diddly squat impact on the environment.’

An individual investor has to draw their own boundaries when it comes to their ethics, and decide how much companies they are invested in are doing proactively when it comes to the environment. 

Royal London Sustainable Leaders has become somewhat of an industry favourite for investing in ESG, and its holdings include finance firm Prudential, energy giant SSE and consumer goods company Unilever.

Royal London says it ‘doesn’t just focus on the environmental credentials’ of the companies but the social aspects too. It says Prudential offers ‘socially positive products in countries without government safety nets’ and Rentokil provides Covid prevention services as well as being the world leader in pest control. 

Apple features heavily in lots of ESG funds but some experts question its green credentials

Apple features heavily in lots of ESG funds but some experts question its green credentials 

Meanwhile, the world’s first vegan ETF – US Vegan Climate ETF – has little focus on food or farming and its top 10 holdings include Microsoft, Tesla, Nvidia, Paypal and Google parent company Alphabet. 

Claire Smith, chief executive of Beyond Investing, the issuer behind the Vegan ETF, says its high exposure to tech is largely because its screening takes out large portions of other sectors like healthcare (because of animal testing) and consumer discretionary (because of animal products in products).

‘We attempt to provide from the companies which are available in the market an index which permits people who care about animals and the environment to invest according to their values and avoid the exposures which they do not want to hold because of the damage done by these companies, whilst maintaining a portfolio construction methodology that reduces tracking error versus the market.’ 

What other funds might you consider?

 Long-established investment trusts Impax Environmental Markets and Jupiter Green are popular picks for eco-conscious investors.

The Impax fund focuses on clean energy and energy efficiency, water treatment and pollution control, waste technology and natural resource management, and sustainable food.

Jupiter Green also invests in companies looking to solve environmental problems. Some of the companies it backs include Renewcell, which breaks down and recycles used textiles, and Hoffman Cement, which produces low carbon cement.

How should investors pick a fund?  

Investors should first decide on their own personal boundaries and ethical values and from there try to find things that fit within that definition.

Some investors may have a real interest in environmental issues, while others have moral objections to having money invested in areas like tobacco.

Jason Hollands gives his top tips for picking a good ESG fund.

‘Investors need to look for funds who publish their policies in a transparent way and don’t just adorn their marketing material with warm words and pictures of wind turbines.’

‘Also look for evidence that the fund will report back on the impact they have made and how they have used their influence, such as disclosing how they vote at shareholder meetings. If you want your money to make a difference, invest with funds that will use shareholder influence.’

For Jason Hollands, managing director of investment platform Bestinvest, FP WHEB Sustainability Fund takes one of the most comprehensive approaches to sustainability.

Its top holdings include health company Agilent Technologies and Royal DSM, which aims to improve the efficiency of global food supply chains. Its three and five year returns have come in at 11.06 per cent and 11.36 per cent respectively.

The fund is managed by WHEB Asset Management, a small boutique solely focused on managing an ESG strategy. It has an independent advisory committee to review and scrutinise its holdings, and publishes how members vote and reports on the impact made by the companies in its portfolio.

Zoe Gillespie, investment manager at wealth manager Brewin Dolphin, singles out Pictet as a fund house ‘that specialises in what you might call “proper” sustainable investment.’

She highlights Global Environmental Opportunities as particularly ESG-focused, investing in a range of largely US-based life sciences, water and engineering companies.

Given the demand for ‘proper’ sustainable investing, there is room for new funds looking to align to the UN Sustainable Development Goals – which include clean water, zero hunger and affordable and clean energy. 

FP Octopus UK Future Generations is one such fund, which launched last month aiming to tackle climate change and invest in healthcare. Among its top holdings are medical equipment company Smith & Nephew and textile tech company HeiQ.

‘So far, most of the ESG and sustainability focused funds to launch have shown a bias towards investing in larger companies,’ says its manager Dominic Weller.

 ‘Limited and flawed ESG data especially on smaller companies exacerbates this problem and has led to many funds avoiding companies which do not tick the right boxes altogether. This is a missed opportunity.’

What does responsible investing jargon mean? 

Two thirds of savers want to invest responsibly but are baffled by jargon: How to tell ESG from SRI and impact investing… and spot greenwashing here. 

The portfolio will be made up of between 50 and 70 holdings, and fees include an annual management charge of 0.85 per cent and an ongoing charge of 1.5 per cent.

Are ETFs a good option?

For investors who want a passive option there is no shortage of ‘responsible’ trackers. The current landscape has been dominated by Blackrock’s multi-billion dollar passive investment products, notably its thematic iShares ETFs.

It now has more than 100 index and ETFs in its sustainable range.

The largest ETFs have relatively broad ESG mandates which might not meet your particular worldview, but there are a plethora of specialised thematic ETFs such as iShares Healthcare Innovation UCITS ETF, iShares Agribusiness UCITS ETF and Rize Sustainable Future of Food Ucits ETF.

They may prove useful for investors looking to get access to baskets of shares in very particular areas. 

But some experts claim that ESG investing is inherently an active management process, because of the research and due diligence necessary.

‘You can’t buy cheap funds like ETFs that will do anything. If you’re a more deep clean investor like Path Financial, we’re not going to find solutions in cheap artificial intelligence-based ETFs, you’re only going to find it in actively managed funds because they’re the ones who go into the degree of granular research necessary,’ says MacDonald.

Bestinvest's Jason Hollands thinks an overall passive approach to ESG investing is unconvincing

Bestinvest’s Jason Hollands thinks an overall passive approach to ESG investing is unconvincing

Hollands agrees a passive approach has its limits in large part because the funds ‘rely heavily on scoring systems that are limited in scope and in large part based on company disclosures’.

‘Big corporations have got particularly adept at improving the way they present themselves in this respect and they have large and well-resourced investor relations teams working on this stuff.

‘An investment strategy based on company disclosures for carbon emissions does little to effect change, but instead skews such passive funds to low emission sectors like tech companies.’

Meanwhile, some ETFs with a broader ESG scope may include oil firms, so if that is something you want to avoid you should take a look at their holdings before you invest. 

‘While passive funds can be useful to get access to baskets of shares in very particular areas – such as renewable energy companies or companies involved water supply management – in my view a passive overall approach to ESG is unconvincing,’ adds Hollands.  

Read more at DailyMail.co.uk