Ethical Investing
Ethical investing…Does it actually do what it says on the tin?
You may have noticed that advertising for ‘green’ or ‘ethical’ investing seems to be everywhere, targeting the general public by encouraging them to invest their pension or other assets they may have into funds that ‘make a difference’. There’s no disputing the fact that change needs to be made, quickly, and the appetite for it is definitely growing. According to Which?, UK investors poured a staggering £16 billion into ‘responsible funds’ in 2021, but how much of this is going towards making a genuine difference?
Regulatory changes are requiring advisers and investment managers to add environmental, social and governance (ESG) considerations to their suitability checks. This means we are now required to have the conversation with our clients about their thoughts on ethical investing. This, of course, is a positive move from the regulator but presents firms like us with a significant challenge in offering a suitable solution. We are inundated with fund managers contacting us about their latest ‘green’ fund offerings. With so much choice, you would think that finding a solution would be easy, but there are currently no rules in the UK on what qualifies as an ESG or sustainable fund. This means fund managers can use the label for their fund, regardless of their actual commitments to sustainability. This presents the very possible risk of investing in a fund believing it’s ‘greener’ than it really is, otherwise known as ‘greenwashing’.
There is also the issue for those that already hold less ‘ethical’ investments. Rather than seeking out genuine ‘green’ funds, they may be tempted to make a positive change by disinvesting from what they see feel no longer fits with their views. While this may seem like a sensible approach, sometimes the actual results are just ‘shuffling the deck’ as the investment is ultimately just being bought by another investor, who cares less. The reality of this situation is that you are not starving that company of cash, the investment is still in existence, it is just now held by someone else!
The vast majority of clients we speak to have a desire to make a positive impact, but understandably are keen that we also consider the cost and performance of green funds, and their overall financial planning goals. For those who feel particularly passionate about investing ethically, ‘Positive Impact’ portfolios are specifically designed to make an impact and invest in good. However, because of the management and research involved, they typically run with a higher cost. The alternative offering are funds that would simply just screen out the negative, but with no current regulations surrounding this screening process, this is still a complicated and grey area.
At the moment, the onus is on the investor to spot ‘greenwashing’ in their funds. We feel that, for now, it is important to understand the legitimacy of appealing options and possibly to let regulation catch up on what is a rapidly expanding industry.
If, perhaps, investing isn’t the most effective means of making a difference the moment, we could be looking at implementing changes to other areas of our lives. A good place to start is by taking a look at your individual carbon footprint, which can be calculated online at www.wwf.org.uk. For now, the small changes we all make now to the energy we use, food we eat and ways we travel may be the best way to make an immediate impact.