Eight ways to combat greenwashing risk in funds

The Financial Conduct Authority has new rules coming into force (from 31 May 2024) to protect investors from greenwashing. 

Over the past five years or so, more investors have been looking to ensure their money is invested in businesses “doing good” in one form or other. Investing sustainably involves fund managers focusing on environmental, social and governance (ESG) factors.

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This trend has not escaped the attention of fund management companies’ marketing teams. As a result, scores of new funds have been launched, or existing funds rebadged, with sustainability at the centre of the investment process.

While a greater choice of funds is welcome, investors need to be wary of “greenwashing”. This term describes the process of asset managers pushing themselves or their funds as “green” through marketing, rather than fully integrating ESG and sustainability into their investment processes.

While the new anti-greenwashing rules will hopefully have the desired effect of reducing the risk of investors being swayed by sustainable claims that are vague or unsubstantiated, there are steps investors can take themselves.

Here is a checklist to help fund and investment trust investors detect potential greenwashing.

Understand the strategy

Before researching various sustainable fund strategies, take a step back and consider what sustainability means for you.

Do you want your money to be invested in a certain sustainable theme? And are there certain sectors you don’t want to invest in? Once you’ve decided, it’s time to find an investment strategy to match.

Getting to grips with how the fund invests will help reduce the risk of potential greenwashing. As part of your research, browse interactive investor's sustainable long list. We have categorised socially responsible and environmental funds, investment trusts and exchange-traded funds (ETFs).

From that long list, we have chosen our ACE 40, the UK’s first rated list of sustainable investments.

Do the fund’s holdings tally with its strategy?

Some fund houses disclose their funds’ full holdings, while others make only their top 10 available each month.

Whichever list is available, it’s worth scrutinising it. If there are any holdings that look out of place for the fund’s strategy, then this certainly warrants further investigation.

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Engagement

Sustainable funds don’t just exist to meet investors’ expectations on returns – vital though that may be. They also have a responsibility to engage with the firms they invest in, challenging them on issues that matter to investors.

You should be able to look through the fund manager’s voting records for the companies it holds on issues that are important to you, for example, equal pay or net zero, to see how they voted at AGMs.

Be wary of fund firms that do not give examples of how they engage meaningfully with companies.

Parent company hypocrisy

A fund management firm should practise what its sustainable team preaches. If your sustainable fund positively engages with companies to increase female representation at board level, then you should expect to find women on the board of the fund management company.

Similarly, if a sustainable fund avoids companies that have not committed to meeting net-zero targets, then you should expect the asset manager selling – and making money from – the fund, to have its own net-zero plan.

What’s the heritage of the team running the money?

Has the fund manager been investing sustainably since Greta Thunberg was in nappies, or are they in their early years as an ethical investor?

A novice fund manager at the helm may do a good job, but a fund management team with experience of investing ethically way before it became trendy reduces the risk of potential greenwashing.

What’s the track record of the fund?

The track record of the fund is another thing to check. Has it had a sustainable mandate for a long time, or changed to a sustainable strategy relatively recently? Be sceptical about launches from fund firms with no experience in the sustainable space.

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Resource

Does the fund firm employ a large team of sustainable fund managers and analysts? If it does, this arguably shows a healthy level of commitment towards sustainable investing.

It is also worth finding out whether the fund managers and analysts assess the sustainability characteristics of companies themselves, or if they rely heavily on third-party data providers.

Transparency

Finally, if your fund is purporting to be good for society as well as your wallet, you should expect transparency to be part of the package. After all, it’s your money, which you have entrusted to a fund house in good faith. You can examine a fund’s transparency to varying degrees. For example, check whether a fund’s full holdings are available. If not, why not?