Are ESG funds really green?

Post-pandemic and with climate change high on the agenda, investors are looking more than ever for their investments to contribute to sustainability, with ESG at the fore.

ESG has become an increasingly popular way for investors to evaluate companies and achieve profits on the one hand and sustainability on the other.

ESG criteria which includes environmentally friendly, socially responsible and accounting transparency methods have become ‘must haves’ in an investment portfolio.

A key metric in ESG scores, not often discussed though, is objectivity – to ensure investors take a trusted and unbiased approach to sustainable investing. But what do we know of the transparency of ESG funds?

With all the positive effects of investing in sustainability and the green economy, one negative effect has also emerged – a barrier called ‘greenwashing’, which is feeding apprehensions that some companies and fund managers are misleading investors by suggesting companies fall into the ESG category, but in actual fact, do not.

ESG ratings are in reality subjective, considering there are different views of whether some companies are sustainable or not. But how can we identify “greenwashing” when investing?

Greenwashing can mostly be recognised through a company’s marketing approach and communications; however, it can be more abstruse, especially in company reports and ratings. Companies therefore must transparently demonstrate their credentials, something which does not always happen.

In theory, the main purpose of ESG funds is to help investors to invest in companies with good practices in place and that promise to promote a favourable, long-term endeavour, with ESG metrics at the core.

To bypass the possibility of greenwashing, funds must require transparent information from companies and pass that onto investors for them to make educated and informed investment decisions.

By providing detailed information to investors, (how the company meets ESG criteria, such as diversity, environmental concerns, transparency of brand etc) a fund can build a respectable relationship with investors, and consequently accomplish positive climate action.

There are a lot of regulatory bodies and regulations being developed to reduce greenwashing (UKSIF, SFDR, FTC.), but it still happens.

It is impossible to completely eradicate greenwashing in companies and funds. The only thing that investors can do is to conduct due diligence and always pay attention. Just because someone says a company comes under the ESG umbrella, does not mean it is.

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