Be critical of ESG credentials to avoid greenwashing funds

In a recent manifestation of this growing social conscience, both Greene King and Lloyd’s of London have expressed regret at their respective founders’ links with the slave trade in reaction to the Black Lives Matter movement.

Businesses need to demonstrate their green credentials if they are to survive being held to account if they are seen to be lacking in this respect. 

The flip side of this is the practice of greenwashing, where these credentials are overplayed in an attempt to avoid public criticism.

Greenwashing, however, is not restricted to those companies seeking to attract custom and investment. 

Within the asset management industry, this growing emphasis on sustainability, and an investor demand for funds that embrace it, has led to the proliferation of products that integrate environmental, social and governance considerations within their processes. 

Unfortunately, investment is not immune to greenwashing.  

As asset managers have seen the opportunity to attract money from investors in this area, some have said they take a sustainable or ESG approach when they do not. 

This leaves financial advisers in a vexed position. 

Investors are increasingly demanding that their ethical considerations are addressed as part of fund selection, while incoming Mifid II legislation will oblige advisers to question clients on their ESG preferences as part of their fact find. 

It is therefore of crucial importance for advisers to be able to interrogate a fund’s ESG approach and to identify any potential greenwashing on the part of the fund manager. 

However, there are five key attributes that help demonstrate whether funds, and the teams behind them, will meet investors’ expectations.

They should present clear and simple information explaining how the team manages funds

First, advisers should demand transparency. Genuinely sustainable fund managers should be transparent about how they invest and be prepared to be challenged.

They should present clear and simple information explaining how the team manages funds.

Advisers should be wary of meaningless taglines such as ‘sustainability is in our DNA’, which have more to do with marketing than any true cultural adherence to ESG.

Also important is the experience of the team and how it is resourced.

This is especially true when it comes to ESG investing. While new funds might be compelling propositions, they must be backed by expertise which is owned by those running money and not outsourced to a siloed team of sustainable specialists.

Fund managers must also invest in constantly improving their expertise.

Sustainable investing is a specialist area and issues such as climate change rapidly evolve. 

Investors need to be confident that their chosen managers not only have deep knowledge, but are equally committed to ongoing professional development in this respect. 

Fund managers should also live their beliefs through activism. They need to be able to disclose their track record of holding companies to account and encouraging improvements.

Investors need to be given detailed information on a fund manager’s engagement priorities – whether diversity, tax transparency or plastic pollution – rather than just making sweeping statements.

Equally important is their voting history at annual general meetings. 

Finally, this experience and theory surrounding sustainability must impact investment decisions and provide meaningful exposure to sustainable trends compared to more conventional funds.

Mike Appleby is investment manager at Liontrust Sustainable Investment Team