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Greenwashing - the not so responsible ESG trend

We take a closer look at what greenwashing is and how you can avoid this not so responsible ESG trend.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The scale of the climate change challenge is immense. If we want to limit global warming to 1.5°C above pre-industrial levels, global emissions need to fall 7.6% every year this decade. By comparison, the worldwide lockdowns caused by the Covid-19 pandemic are expected to see emissions drop 8% in 2020.

We're more aware of climate change than ever before, and lots of us are doing what we can to limit our carbon footprint. This massive shift isn't going unnoticed by the corporate world.

A slew of the UK's largest companies have committed to reduce their carbon emissions to 'net zero' within the next thirty years, including Barclays, Royal Dutch Shell, and Sainsbury's. That means emissions will have to be avoided completely or – if that's impossible – offset by planting trees.

Businesses will need to do more to show their green credentials if they want to thrive in this new environment.

If not, they could risk sparking outrage, backlash and boycott. But this intense focus on corporate responsibility has given rise to a new trend – greenwashing.

What’s greenwashing?

This is where a company's green credentials are exaggerated in order to avoid public criticism.

Companies aren't the only ones that want to attract business by promoting their green credentials though. These days, investors want to know more about how their money is being managed. This has led some fund managers to cut corners and overstate how much they’ve done to integrate environmental, social and governance (ESG) analysis into their investment processes.

How to make sure your funds aren’t greenwashing

If ESG is important to you, there's a number of things you can do to check they're walking the walk, as well as talking the talk.

Firstly, check that the fund house is signed up to industry initiatives, like the UN-backed Principles for Responsible Investment (PRI). When companies sign up, they make a commitment to incorporate ESG issues into how and where they invest, but also to develop their approach over time. It’s easy to do, just visit the PRI website and search the name of the fund house to see if it's signed up.

Lots of companies produce Responsible Investment reports, which you'll find on their websites. Looking at how much detail these reports go into can be a great way to check if a company is fully embracing ESG. Keep an eye out for examples where managers have mentioned sustainability challenges. Try to figure out whether they have a clear and consistent process for dealing with ESG.

Finally, look for third-party endorsement. Fund managers who’ve made the most progress implementing ESG might receive recognition for their efforts. Some might also be asked to comment on their approach or views to the financial press.

When we analyse funds for the Responsible Investment section of the Wealth Shortlist, we consider all of the factors discussed above. But our size and scale gives us great access to fund managers and their teams. That means we can gauge first-hand how well fund managers recognise and reduce ESG issues in their portfolios. We let clients know about our findings through fund updates.

Here's what good ESG can look like

Aegon Asset Management (formerly Kames Capital) is a fund management company focused on responsible investing. The firm signed up to the Principles of Responsible Investment (PRI) in January 2011, and in 2020 received its fourth consecutive annual A+ rating. That means the PRI has independently agreed that the company's responsible investment practices meet its highest standards.

Aegon also received recognition for its responsible credentials from index providers like MSCI and Sustainalytics.

The firm produces an annual Responsible Investment Report which goes into lots of detail about its ESG processes. It also gives a full breakdown of the company’s voting activity, as well as engagement case studies. The team also produce a range of articles on responsible investment, which are available on their website.

We've backed the Aegon Ethical Equity Fund on the Wealth Shortlist (and formerly the Wealth 50 and Wealth 150) since October 2007.

It's been managed by Audrey Ryan for over twenty years. She aims to identify and understand the key ESG risks of each company, industry and sector she invests in. She also avoids investing in areas which some might consider unethical, like tobacco, gambling and alcohol.

We've met with the manager a number of times over the years and have always found her to be a knowledgeable and passionate ethical investor. The manager's investment process and philosophy, combined with our conversations with her, give us confidence that she takes ESG analysis very seriously.

The fund invests in smaller companies which adds risk.

Aegon Ethical Equity holds shares in Hargreaves Lansdown PLC.

Find out more about Aegon Ethical Equity, including charges

Aegon Ethical Equity Key Investor Information

This article isn’t personal advice. All investments can rise as well as fall in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, please seek advice.


Explore our Investment Times winter 2020/21 edition for more articles like this.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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