May 2022

What is “greenwashing” and how can you keep it out of your portfolio?

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Ethical investing has become huge business over the past few decades. According to Reuters, ethical funds had a record year in 2021, with nearly £500 billion invested in November as investors looked to more closely align their investments with their personal values.

However, ethical and “ESG” (standing for “environmental, social, and governance”) funds have since faced somewhat of a reckoning. This has been in large part because many companies purporting to be ethical have been included in ESG funds while continuing with unethical practices.

Ultimately, this saw investment provider Morningstar remove 1,200 funds – a total of $1.4 trillion of investments – from its “sustainable universe” in February this year, over concerns that these investments were not meeting the necessary criteria.

This process, known as “greenwashing”, is a serious issue facing ethical investing. Here’s why, and how you can keep it out of your portfolio.

Many high-profile companies have been accused of greenwashing

Greenwashing involves companies being included in ESG funds, despite not actually meeting the criteria they’re supposed to. This may be because these businesses have put up a front of ethical behaviour, or simply that managers incorrectly deem them to be ethical when they are not.

One of the most prominent examples of this is the case of clothes manufacturer, boohoo. Previously, boohoo had been included in many ESG funds thanks to commitments to good social standards for its workers.

However, an investigation by the Sunday Times in 2020 found that workers in boohoo’s Leicester factory were exposed to dangerous working conditions and even paid less than the minimum wage.

Ultimately, boohoo was dropped from many funds, but the point remains that it had benefited from additional investment while simultaneously going against the very ideals it was supposed to represent.

More recently, Professional Adviser published details of 17 ESG funds containing companies in which employees admitted wrongdoing in the Grenfell fire scandal.

For many people, investing in companies linked to the tragedy in any way would not meet ESG standards.

These two examples go to show that investing in ethical and ESG funds may not be enough to make your portfolio as socially conscious as you might have intended.

There’s no accepted definition of “good”

Of course, in some ways this isn’t the fault of fund managers or even a deliberate attempt from companies to be included in ESG lists.

Part of the problem is that what can be called “good” is more an issue for philosophers than it is economists.

A simple way to understand this is by reading this headline in Money Marketing, asking whether Russia’s invasion of Ukraine has made defence stocks ESG friendly.

In ordinary circumstances, the answer to this question would probably be no – after all, manufacturing and selling arms that could ultimately be responsible for deaths almost certainly fails on the “social” part of the ESG criteria.

But, if you support governments supplying Ukraine with weapons to help defend the besieged country, then surely an investment in arms companies is currently more socially ethical than doing nothing at all?

This difficulty in agreeing what’s good and bad means companies don’t even necessarily need to greenwash to find themselves included in funds – managers might simply include them as they meet the criteria on surface inspection.

Keeping greenwashing out of your portfolio

Greenwashing is clearly a more pervasive issue than you might think. With companies not behaving as ethically as possible and there being no consensus over “goodness”, it’s seemingly difficult to truly align your values with your investments.

Fortunately, there are still plenty of things you can do to build your ethical concerns into your portfolio. Here are three methods you could consider.

  1. Carefully review the underlying investments in funds

The first thing you should do when investing in ethical funds is to review the underlying investments with a fine-tooth comb.

Of course, as is the case with boohoo, you may not immediately be able to tell whether a company is ethical or not if you don’t know much about it.

But at the very least, you would spot any egregious inclusions of companies that you know conflict with your values.

  1. Choose companies that you personally consider to be ethical

Alternatively, rather than investing in funds, you could simply select companies that you consider to be ethical by your own standards.

For example, if you wanted to invest in companies with good environmental credentials, you could look at businesses that have achieved zero carbon in their supply chains and buy shares in these directly.

Bear in mind that this will be a more time-consuming and potentially costly way to invest. You may also end up with a less diverse portfolio as a result.

  1. Work with a financial planner

Arguably, the most sensible course of action is to work with a financial planner. This way, you can have an expert design an ethical portfolio on your behalf, tailoring it to your needs and ethical standards.

By working with a planner, you can be confident that not only is your portfolio ethical, but that it’s pulling in the right direction towards your goals.

Want an expert to manage your portfolio? Speak to us

At Holborn Financial, we can help you design an investment portfolio that works for you. Whether you want to make sure that your portfolio is free from greenwashing, or you simply want to balance how much risk and reward you’re facing, we can help.

Email info@holbornfinancial.com or call 020 8946 8186 to find out how we can help you in your specific circumstances.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.