The growth of the ethical, sustainable and governance (ESG) funds could be hindered by companies and fund houses taking shortcuts to appear more sustainable than they really are, a fund house has warned.
Michelle O'Keefe, who works on the £90m Baillie Gifford Positive Change fund, said because the ESG investment world has expanded rapidly there is no standardised reporting method from either ESG funds or from companies.
This means many companies are able to appear ESG compliant at the "headline" level, without in practice running in line with ESG principles.
The practice of companies seeking to be ESG compliant through artificial means is known as "greenwashing".
Ms O'Keefe said: "We have to really look at the company, not just at what they are doing at the headline level, there is a bit of a scramble right now, with some companies trying to catch-up.
"One of the ways this happens is companies engage in philanthropy, but actually the core of the business is not really about ESG at all.
"That is why we are working with some others in the industry to standardise the reporting."
The Baillie Gifford Positive Change fund is the top performer from more than 200 funds in the IA global sector over the past year.
The fund invests in companies that invest in four different segments. These are social inclusion and education, environment, healthcare and quality of life, and "base of the pyramid", which means companies that benefit those who earn less than $3,000 a year.
Alistair Cunningham, financial planning director at Wingate Financial Planning in Surrey, said: "Invariably it is hard to facilitate ESG preferences in a well-diversified portfolio that meets our investment ethos.
"I think the number of enquires and consideration of ESG is up, but we’re not necessarily recommending ESG funds more."
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