Sustainable & Responsible Investing Has Become Popular for Younger & First-Time Investors, But How Can You Tell When an Investment is Truly Ethical & Not Just Greenwashing?
The rising popularity of responsible investing, as wonderful as it is, is leading to an increase in brands and companies greenwashing.
This increase in consumer demand means more money is being invested in ethical companies and brands – renewable energy, ethical supply chains, and medical innovations that help society. At the same time, people are divesting from industries that cause harm including fossil fuels, gambling, and tobacco.
However, it also means an increase in green marketing tactics that present misleading or false claims regarding environmental impact, socially responsible products, or sustainable practices. As a consequence, the world of responsible investments is becoming tainted by greenwashing, making it difficult for responsible investors to ethically invest.
But what is greenwashing? And how can you differentiate between genuine ethical investments and not-so-responsible “green claims”?
What is greenwashing?
Greenwashing by funds is the practice of making unsubstantiated or misleading claims about the sustainability or environmental benefits of their investment products. Unfortunately, just because a fund uses the term ethical, sustainable, green, or responsible in its description, or claims to be fossil fuel free, does not mean this is the case.
Examples of Greenwashing:
Many responsible investment funds use a screening process to avoid harmful companies, but these screens vary widely between funds and often have exposure limits. As an example of greenwashing, a fund might screen out fossil fuel companies but only if their revenue from fossil fuels exceeds 20%. They will claim to screen out fossil fuels, but a closer look shows some of these companies have made it into the portfolio. If you invested in this fund and strongly oppose the continued use of fossil fuels, you may unknowingly be supporting an issue that you feel strongly against.
A financial adviser can help you understand these funds, bypass the green advertising, and uncover how true-to-label they are, so you know your money is funding companies that align with your values.
How Can a Financial Adviser Help You Avoid Greenwashing Funds?
There are a few key things an adviser will look out for when researching funds to assess how socially responsible and environmentally conscious their offerings are.
Firstly, does the fund publicly disclose which companies they’re investing in?
Many funds will provide a list of their investment holdings, usually in arrears to protect their portfolio. If the fund only supplies the top ten holdings, it’s difficult to know how responsible it is. This is where working with a financial adviser is beneficial, as funds often provide a full copy to a financial adviser on request.
Secondly, is the fund’s voting history publicly available? And what are they supporting?
As (usually large) shareholders, fund managers can vote on resolutions for the companies they hold and significantly impact results. Are they voting for or against issues such as climate change or human rights? Again, funds are often willing to disclose their voting record to advisers.
Thirdly, how engaged is the fund with the companies it invests in? As well as voting, funds can meet with companies and use their influence to get boards to improve sustainability practices. An adviser can regularly speak with fund managers to really understand this engagement process.
Other things an adviser might look for to assess how ethical or responsible an investment portfolio is could include reliable third-party certification and corporate environmental performance over time.
Example of Genuinely Responsible Investment Funds
What are some examples of funds that actually walk to the talk when it comes to responsible investing?
BetaShares has an Australian exchange-traded fund (FAIR) that uses strong screening with a 0% tolerance on many harmful issues including fossil fuels, animal cruelty, and the destruction of valuable environments. They even exclude companies for payday lending or lack of gender diversity on the board.
As well as negative screens, FAIR incorporates positive screening as the fund preferences companies that are leaders in sustainability such as renewables, recycling, and water efficiency. However, their voting record is not publicly available.
Another eco-friendly example is Future Super, which excludes companies involved in fossil fuels, gambling, tobacco, live animal exports, and many other ethical concerns including poor corporate governance and male-only boards. They have transparent investment holdings and a public voting record. They also have a positive screening process resulting in exposure to renewables and energy efficiency.
Is There a List of Responsible Funds That I Can Choose From?
The Responsible Investment Association of Australasia (RIAA) has developed a tool called Responsible Returns to search for responsible funds available in Australia and New Zealand.
You can select the top two issues you’d like to support such as Sustainable Water or Impact Investments. You then choose the top two issues you want to avoid such as Fossil fuels and Tobacco. It lets you decide the kind of product, e.g. investment or super, and if you want to invest in Australia or New Zealand.
The results will show all the providers that match your search. This is a good starting point but be aware that some of the products shown may have low levels of screening. This means that the investment holdings of these funds may not actually align with your values.
The Ethical Advisers’ Co-operative (EAC) have just released their green leaf ratings for a selection of managed investment and super funds. These ratings are based on the quality of the underlying investments, transparency and disclosure including voting, as well as proof of engagement; funds should vote and engage with the companies to create positive change. The ratings are designed to shine a light on greenwashing and reward funds that are doing the right thing. The Ethical Fund Ratings are based solely on the ethics and sustainability of the funds and do not include financial information.
There’s a lot of variation between responsible investing products and it’s a good idea to seek professional advice to protect yourself against greenwashing.
Start Responsibly Investing with the Right Help – Contact Novo Wealth Today
Starting your responsible investment portfolio is much easier with the right help. As a dedicated ethical financial adviser, Novo Wealth can help you ignore the misleading environmental claims and greenwashing jargon, and understand how responsible funds may work in conjunction with your overall financial plan.
IMPORTANT: This information is general in nature only it does not take into account your individual circumstances. We recommend that you seek professional advice before making any investment decision.
Please call 0424 224 225 or email pgarner@novowealth.com.au to discuss.
All the best
Paul Garner CFP®
Certified Responsible Investment Financial Adviser
This article was written in collaboration with Paul Garner of Novo Wealth and Alexandra Brown of Invest with Ethics
