Greenwashing - what it is and how to avoid it

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Greenwashing - what is it and how to avoid it

ESG funds are becoming more important

Increasingly, investors are considering not just how much money their investments will make them, but what the funds themselves are made up of. There is a growing trend for choosing ESG (Environmental, Social and Governance) funds, which will benefit the environment, promote sustainability or are socially conscious.
With ESG regulations coming into force in 2021 under the MIFID II rules, advisers will be required to establish their clients’ ESG needs. With this in mind it’s clear to see why sustainable investing is a hot topic.  Our research has shown that more and more clients are looking for sustainable, responsible funds. James Dalby, Aviva’s investment lead, says, “We’re seeing a lot of interest and demand in the adviser market for funds that fall under the ESG banner.” These funds not only offer an opportunity to make a difference through investment, they are also proving to be successful in the returns they bring .  

Beware the fake fund

So how does greenwashing fit into this new ethos? Unfortunately, the term itself is more environmentally friendly than its definition. Greenwashing essentially describes the act of using buzz words such as ‘ethical,’ ‘sustainable’ or ‘green’ to imply a fund supports ESG, simply to persuade clients to invest in them.
The Investment Association is looking into creating a standard for ESG investing, which will prevent companies using the moniker without doing anything to earn it. In the meantime, the best way to avoid falling victim to such scams is to make sure you know what the buzz words above should mean in real terms and how to spot a potential fake .

What to look out for

James Dalby believes greenwashing will not last long, saying “The very fact that the regulator has come out and has got its eyes peeled should ensure that fund providers and advisers are very cautious.” However, being particularly diligent can only be good for you and your clients! Here are five key areas to focus on when discussing a fund’s green credentials with the fund manager:

1. Does a fund’s description sound too much like marketing speak? We all know the value of a memorable catchphrase, but statements like “sustainability is in our DNA” could have absolutely nothing to do with the sustainability of a fund.

2. Are fund managers being transparent about how they invest in sustainable funds? A manager with nothing to hide will be able to explain their team’s methods and will welcome questions.

3. Does the fund manager know what they’re talking about? The rhetoric around climate change is constantly evolving and managers in charge of sustainable funds need to be fully up to speed on such issues. Managers should be able to demonstrate a comprehensive understanding of the current ESG conditions and be committed to ongoing professional development in this area.

4. Can the fund manager walk the walk, not just talk the talk? Look for examples of situations where the manager has challenged companies’ credentials and pushed for improvements.

5. Is ESG impacting investment decisions? A fund should be able to demonstrate it’s at the forefront of sustainable trends and is generating successful returns. If a fund manager is still leaning towards more conventional investments, s it may be a sign they don’t actually have the knowledge they claim of this sector.

Following these guidelines will help advisers establish a fund’s ESG approach and also identify any possible greenwashing by the fund company or the asset manager. Make sure you know which questions to ask – a manager who is just paying lip-service to ESG will quickly reveal their lack of knowledge.

If you want to learn more about ESG, why not start by accessing Aviva’s ESG Hub? We’re  committed to becoming one of the industry’s leaders when it comes to ESG – find out more about the measures we’re already implementing by visiting the hub.