Responsible investing has become so popular that many fund managers want to get in on the action. But just because a fund is called sustainable or ethical… is it really?
It’s great that responsible investing is becoming more popular. It means that more money is being invested in companies that do good for people and planet such as 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. But with all this money flowing, some funds are using misleading names and commentary, and the universe of responsible investments is becoming tainted by greenwashing.
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. 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.
Many responsible investment funds use a screening process to avoid harmful companies. But these screens vary widely between funds and often have exposure limits. In other words, a fund might screen out fossil fuel companies but only if their revenue from fossil fuels exceeds 20%, for example. 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 invest in the fund, you may unknowingly be supporting an issue that you feel strongly against.
A financial adviser can help you understand these funds and how true-to-label they are, so you know your money is ending up with companies that align with your values.
How can a financial adviser help you to avoid greenwashing?
There are a few key things an adviser will look out for when researching funds.
First, does the fund make it publicly available what 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. Funds often provide a full copy to a financial adviser on request.
Second, 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.
Third, 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.
What are some examples of funds doing the right thing?
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 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.
Future Super 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 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.
Want to know more?
Speak to me about how responsible funds may work in conjunction with your overall financial plan.
IMPORANT; 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 08 8363 8810 or email firstname.lastname@example.org 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