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Investors want to be sustainable but worry about greenwashing

More investors are choosing to invest sustainably but concerns over whether funds are having a positive impact or greenwashing to boost sales abound.

Research by fund manager Liontrust found that 51 per cent of investors polled had chosen to invest sustainably, up from 41 per cent at the end of last year.

The chief motivation was a desire to avoid companies or industries that were harmful to society, a factor cited by 54 per cent of investors.

This was followed by the desire to have a positive impact, concerns over climate change and a desire to invest in line with personal values and principles, factors all cited by 52 per cent of investors.

Green and sustainable investing is rising in popularity but investors worry about greenwashing

But with the number of funds claiming some form of ESG (environmental, social and governance) investment filter mushrooming, there are widespread worries among investment professionals of window dressing.

Liontrust said that fears of this were on the rise, with 76 per cent of wealth managers and 57 per cent of financial advisers saying they had concerns.

Simon Hildrey, of Liontrust, said: ‘With the proliferation of sustainable investment funds so the concern about greenwashing has also increased.

‘Asset managers have a responsibility for transparency and clear and regular reporting. This includes disclosing full holdings, explaining why stocks are held by funds and the impact of these companies. 

‘Impact should cover the exposure of funds to sustainable themes, carbon intensity against the market they are in and how themes relate to the United Nations Sustainable Development Goals.’

The desire for sustainable funds was highest among younger investors, with 79 per cent of those under-35 actively looking to invest in them.

But appetite was strong in older investors too, with 52 per cent of investors in both the 35 to 49 and 50 to 65 age brackets looking for sustainable investments.

A major problem for those looking for funds, investment trusts and ETFs to invest in, however, is that there is no clear definition of sustainable investing and ESG-labelled investments can vary wildly.

Additionally there is confusion over what counts as sustainable, ethical, impact or green investing, with the concepts often overlapping.

What does responsible investing jargon mean? 

How do you tell ESG from SRI and impact investing, and spot greenwashing.

Baffled by the jargon? Read more here. 

This can lead to investors having to spend a substantial amount of time researching funds and trying to unpick exactly what they aim to do and invest in.

Coupled with concerns that some fund managers may be jumping on the ESG bandwagon to boost sales, this means that investors may simply shun the issue as too complex.

When investment rating website FundCalibre asked its visitors whether they were likely to put money into funds that invest responsibly, 63 per cent said they were.

It said: ‘But what is holding the other third of investors back? Confusing terminology, a lack of choice and the perception that ESG investing is not yet mainstream enough, were among the top three answers.’

Those who answered FundCalibre’s questions said environmental issues were the most important element of ESG, something which chimes with the popularity of renewable energy funds and trusts. 

These manage to tick two boxes for green investors, as they are a relatively simply concept to understand and also many deliver good reliable dividend returns.

Ryan Lightfoot-Aminoff, senior ESG research analyst at FundCalibre, said: ‘When it comes to our daily lives, many of us are already making good choices: recycling more, using cars less (or going electric), consuming less plastic, eating less meat… the list goes on. 

‘And there has certainly been an uptick in interest from investors in recent years. But there is clearly more work to be done by our industry to make ESG investing more accessible to investors and to articulate better what funds are available and what they are trying to do.’

The enthusiasm for green energy investing is highlighted by renewable energy claiming seven of the top ten spots in DIY investment platform Interactive Investor’s best-selling funds and trusts on its ethical long list.

Greencoat UK Wind was the most popular, followed by Gore Street Energy and Renewables Infrastructure Group.

The exceptions to the renewable energy theme were Liontrust Sustainable Future Global Growth, Civitas Social Housing and Stewart Investors Asia Pacific Leaders Sustainability.

Most bought funds and trusts on Interactive Investor ethical long list 

1. GREENCOAT UK WIND

2. GORE STREET ENERGY

3. THE RENEWABLES INFRASTRUCTURE GROUP

4. NEXTENERGY SOLAR FUND

5. FORESIGHT SOLAR FUND

6. LIONTRUST SUSTAINABLE FUTURE GLOBAL GROWTH

7. CIVITAS SOCIAL HOUSING

8. JLEN ENVIRONMENTAL

9. STEWART INVESTORS ASIA PACIFIC LEADERS SUSTAINABILITY FUND

10. BLUEFIELD SOLAR INCOME

Source, Interactive Investor, September 2021 

One issue for savers looking to make environmentally friendly investments is that if they rely too heavily on renewable energy, they will be over-exposed to the sector and particularly vulnerable to any downturn.

It’s important – as with any investments – to make sure that green investing themes are balanced and part of a well-diversified portfolio.

One option to branch out for green investors could be trusts such as Impax Environmental Markets and Jupiter Green, which target companies helping to tackle or mitigate climate change problems and can offer a broad range of investments, from firms solving recycling problems, to those trying to find sustainable alternatives to cotton, or improve agriculture.

Funds and trusts that have a clear and understandable ESG strategy while investing across a broad range of sectors, may also be an option, as could companies getting involved with the circular economy, which aims to tackle disposable thinking and make better long-term use of resources.

BMW's iVision Circular Concept is an electric car made from 100% reused materials that can be completely recycled at the end of its life - an example of circular economy thinking

BMW’s iVision Circular Concept is an electric car made from 100% reused materials that can be completely recycled at the end of its life – an example of circular economy thinking

The Ellen MacArthur Foundation, founded by the famous British yachtswoman, is a proponent of the circular economy philosophy and works with businesses to help them improve.

It says: ‘A circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems.’

An example of this was car giant BMW’s announcement that it wants to increase recycled materials used in its manufacturing from 30 per cent to 50 per cent in its next generation of vehicles and get to 100 per cent by 2040. 

It recently unveiled an iVision Circular electric concept car that it said could be made entirely from recycled materials and have all its elements full recycled at the end of its lifespan.

Investment giant Blackrock launched a Circular Economy fund in partnership with the Ellen MacArthur Foundation in October 2019.

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