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What happened to Environmental, Social and Governance (ESG) investing?

Understand more about the evolution of ESG related funds from niche to mainstream from our investment research expert Tom White and see the simple questions investors can ask to help identify credible ESG investments.

Published on 30 May 20244 minute read

Written by Tom White

A decade ago, ‘Ethical’ or ‘Green’ funds were seen as a sleepy backwater in the investment world. They were often focused more on companies promoting environmental and moral credentials than their ability to make money, and all too often that was reflected in their performance. Their portfolio might have been green, but all too often performance was in the red.

Funds were commonly branded as ESG or sustainable or environmentally friendly, all with different emphases. What they shared was a belief that investing is about more than short-term financial success.

Unfortunately, these claims were tainted with greenwashing – this is when a company makes out it is greener than it really is. This made it difficult for investors to be certain an ESG investment did what it said on the tin.

Thankfully there are straightforward regulations to clarify ESG, sustainable and environmental claims to increase transparency and investor confidence.

Corporate accountability

Corporate accountability is where a company takes responsibility for its actions. In some cases, corporate accountability is simply a case of a company doing something wrong and getting found out. 

Corporate wrongdoing

Of course, corporate wrongdoing has always been around, but each scandal serves as a further reminder that dishonesty doesn’t always pay, as shown here with these recent examples:

  • In 2018 German fintech company Wirecard soared into the DAX index, briefly becoming larger than Deutsche Bank, before collapsing in 2020 after longstanding allegations of fraud proved correct
  • In 2020 Anglo-Australian mining giant Rio Tinto was hit by a wave of bad publicity after it destroyed caves in Australia considered sacred by the local aboriginal people. The scandal ultimately led to the resignation of its CEO

Greenwashing

If you’re choosing ESG-related funds for your portfolio, it’s important to make sure your investments are the real deal. The Financial Conduct Authority (FCA) introduced Sustainable Disclosure Requirements (SDR), designed to regulate the way sustainable and environmentally friendly claims are communicated to investors.

The SDR regime intends to clarify sustainability related claims, so investors can choose their funds with confidence. Solutions include straightforward guidelines to help investors make more informed decisions.

To get you started, these questions can help investors recognise credible investments, and avoid greenwashing:

  • Are all claims correct and substantiated? FCA regulations require companies to substantiate all sustainability related claims for the entire life cycle of the investment, to improve transparency and minimise greenwashing
  • Is all investment information clear and accurate? All communication and information must be fair, clear and not misleading. This includes the funds on platforms including Bestinvest

A wider, more regulated universe

Companies with sound credentials can now be found in almost any part of the market. All sorts of businesses are more focused on the impact of their operations. If they don’t, then their staff, or customers, or the government are likely to make them aware.

Increased environmental awareness and FCA regulations makes it harder for companies to gloss over their mistakes and easier for consumers to steer clear of them.

Sustainability related solutions are commonplace

Being kind to the environment has evolved quickly in recent years, from engaging selling point to supporting the circular economy. The fashion industry in particular embraced sustainability related opportunities, such as digital passports. These track the journey of an article of clothing from production all the way to secondhand sales.

The purpose behind investments

For fund managers who invest for the long term, considering the wider impact of a company is simply common sense.

The best fund managers have always looked at companies' governance, preferring those whose management is incentivised to deliver for investors as well as themselves.

A business might be profitable today, but if its treatment of the environment threatens its future then for many, buying its shares is as much playing pass the parcel as it is investing.

It's important to remember this article is not personal advice. If you are in doubt as to the suitability of an investment, it's a good idea to speak to a qualified expert. You should also remember all investing carries risk and you may not get back the amount invested. Some ethical funds may, by definition, have a limited universe which may affect performance. 

How Bestinvest can help

Bestinvest has been researching investments in this sector for a long time and has helped many people invest in line with their objectives for many years.

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