Everywhere you go people are talking about green investing – why it’s important, how it’s the ‘in’ thing and how many more ‘green funds’ are coming on the market.
But how do you know that the fund you’re interested in is genuinely green and not just a ‘green-washed’ old fund or something that invests in energy production that may be considered green but actually does more harm to the planet than the extraction industries?
Happily there are a few questions you can ask of the fund (or of yourself) when you find one you’re interested in. Here are some to consider
- Why everyone is going on about green investing or ‘sustainable’ investing
- Questions you can ask to make sure your fund is sustainable
The COP26 get together in Glasgow has brought sustainable investing into the news to a point where it’s pretty much impossible to avoid it. not only that but City firms are ramping up their ‘green’ offerings to an even greater extent than they were in the last few years. ‘If you’re not green you’re mean’, is the unspoken slogan among fund marketing people it seems.
But then that’s what we’re hearing in the media too.
- The Investment Association has said that responsible Investment funds saw over £1 billion of investments in June, and a total of £4 billion for the second quarter of this year – the highest quarterly inflows since their data was first collected.
- Lisa Stanley of the Goodwithmoney website says “over the past five years, responsible investing has been one of the fastest growing sectors of the market. The most recent Good Investment Review revealed that ‘assets under management’ in sustainable investing funds rose by a whopping 40 per cent in the last six months alone.”
But how can you know that the funds you are considering really are green and sustainable? How do you know they are in line with your ethics? It’s easy for marketing people to make them look good with a pretty, green website and impressive words like ‘sustainable’, ‘eco’ and ‘ethical’.
Mary Stevens, Innovation Manager at Friends of the Earth says, “Our view is that it’s really hard to tell if a fund is truly green. There’s a real lack of transparency. Anyone can call their fund ethical or sustainable. There ought to be more pressure on companies to conform to clearer standards of what these terms and labels mean.”
However, Ryan Lightfoot-Aminoff of Chelsea Financial Services says the industry has already cleaned up its act for investors, saying “the government has also just announced a new Green Technical Advisory Group – an independent body to provide a variety of stakeholders information on concerns over greenwashing. It will implement the framework of the Green Taxonomy providing standards for defining environmentally sustainable products.”
is it going to make money?
You also have the basic investing question of whether the fund you’re considering will be profitable long-term and grow your money.
Ultimately the most important thing for you and your investments is to make the most of them so that you have a good nest-egg to live off later on. If you can prove to yourself that the investment is also good for the planet then that is the ultimate, but it’s important to make sure that it’s good for you first.
It’s a lot for an ordinary investor to work out all of these factors, so here are the some questions you can ask of a fund you are interested in to work out if your ‘green’ fund is worth the money.
what kind of fund do you want to support?
There are two ways to invest in environmentally-friendly funds:
- one is to invest for ‘impact’ where you invest in funds that make a positive difference to the environment
- the other is to invest simply to ‘do no harm’ – so that you know the underlying companies have reduced their carbon footprint or have gone carbon zero. Once you get that clear in your mind you will know better what to look for in funds.
what is the process in this fund?
As mentioned above, iIn the online world it’s far too easy to make something look green (with nice pictures of wind turbines and so on) when it actually isn’t.
- Never just go with a fund name or label that you like the sound of. Check the exact screening process the fund uses to decide which companies to include and which to exclude and why.
- Remember that the words ‘green’, ‘sustainable’ and ‘environmentally friendly’ are subjective. Fund managers will use different principles based on their personal views of what these terms really mean, and you may not agree with them.
- Research from the ethical organisation Triodos Investment Management has revealed that, of the top ten companies included in several well-known sustainability indices, only one company actually meets Triodos’ strict minimum standards.”
how long have they been in this ethical space?
- Find out how long the firm or fund manager has been managing money in these sustainable sectors, Lisa Stanley of Goodwithmoney adds
- “Are they truly experienced or are they just hitching a ride on the bandwagon?”
- It’s important to check not only their green credentials over this time but also their actual financial performance. Laith Khalaf of AJ Bell says “It’s important not to let the perfect be the enemy of the good. You’re never going to find a fund that totally reflects your ethical outlook, but finding a reasonably good fit should provide you with peace of mind without scrimping on performance.”
- As with all investments, past performance is not a guarantee of future profit but a fund that has at least five years-worth of good returns and a portfolio that largely aligns with your views is probably going to be good for you.
are these ‘brown’ companies that are changing their ways?
One way to view investing in the future of the planet is to support funds that include extraction industries that are cleaning up their act.
- Kit Winder of Southbank Investment Research says “You could go for old companies that are best in their class. For example, Shell and BP are buying into renewable assets and are committing a lot of capital towards working on that so you could consider that that is worth supporting. I personally don’t want to but there is an argument to say that improvements should be supported.”
- Everyone has a different view of what they would like to support with their money and it’s up to you to work out what you consider to be most helpful. Sometimes it can work well to support ‘brown’ industries that are cleaning up their act, particularly if they have a good track-record of being profitable.
are they actually doing harm?
This is a tough one to find out, but as time goes on we’re likely to see stories coming out in the media about different companies that purport to be ‘green’ but are actually doing more harm than the ‘brown’ energy producers.
For example, Channel 4’s ‘Dispatches’ programme has reported on this company that is chopping down hardwood forests to ‘feed’ their energy production plant rather than coal. How helpful is that to the planet?!
There is also worrying information in Michael Moore’s documentary ‘Planet of the Humans’ that shows the problems of trying to produce ‘green’ energy including the fact that many supposedly emission-free engines are ultimately powered by traditional generators. It also shows companies cutting down forests and even using animal bodies to create fuel. Ugh!
It’s hard for the ordinary person to work out whether a green fund includes some of these bad practices, although it’s easier to work it out with individual companies, but it’s certainly worth keeping an eye on articles and programmes in the media that look at the green credentials of companies and funds that purport to help the planet.
try a green index-tracking fund
Index-tracking funds are a cheap and easy way to invest easily in the stock market and there are a number of ‘green’ indexes now that can be bought into.
However, as with managed funds, there are many shades of green in the passive funds.
“Look at the synopsis and summary and that will show you what’s under the hood,” says Tom McGillycuddy, co-founder of impact investing app circa5000. “See what companies are in the top five or ten in the list and that will give you an idea of whether it’s the fund for you. For example, I look for those offering genuine climate change solutions. So if you see Spain’s Iberdrola and the Danish Vestas Wind Systems in the top five, for example, then you know you’re in safe hands.”
or try a green etf
Green’ ETFs can also be an easy and cheap way to invest in a sustainable fund, except that, like index-trackers, by their automated nature, they can easily sweep in companies that do not align with your views so it’s important to see what’s under their bonnet!
Kit Winder of Southbank Investment Research recommends RIZE ETFs as they combine personally-picked stocks with automated tracking. “They do well-researched, thoughtfully constructed, constantly updating ETFs” he says. “It’s not just ‘let’s take a sector and invest in every single stock’. There are no greenwashing funds that turn out to have big oil majors in there.”
what are the fees in your green fund?
Some green funds, and particularly ethical pension funds, have incurred higher management fees as they are considered ‘niche’. Watch for this as it can really eat into your profits.
Clare Reilly of PensionBee (which has its own ‘green’ pension fund) says “As an investor you will need to consider if the potential returns of your investments are likely to be greater than any additional money you may spend in fees, as a fee saving of just 1% per year can have a huge impact on the ultimate pension pot you will retire with.”
are there too many green subsidies here?
Look to see if a lot of the companies invested in are propped up by Government subsidies.
- Some environmentally-friendly funds may do well because they invest in a number of companies that receive large Government hand-outs. Benny Peiser, director of the climate-sceptic Global Warming Policy Forum says he believes this makes them vulnerable as the hand-outs are largely political. “Some green companies are doing well now because they are so well-subsidised” he says. “It’s not a very sustainable business model if you can’t stand on your own feet and you have to rely on hand-outs.”
- Ask how many companies in the fund benefit from generous subsidies. Will they survive when the funding is removed?
use a platform for green guidance
Investment platforms such as AJ Bell Youinvest, Charles Stanley and Interactive Investor list their favourite ethical funds which gives you a short-list to choose from. Use that shortlist to cut down on some of the research you need to do.
For example, interactive investor breaks down its favourite funds into three ‘ACE’ investment styles (Avoids, Considers and Embraces), to help you choose the ones that fit your values.
John Fleetwood, founder of 3D Investing also recommends one set up by The Big Issue. “Their platform, The Big Exchange, only features ethical and sustainable funds,” he explains. “They rate the funds for you too as bronze, silver or gold and provide information as to what’s in the funds. Investing through them also helps to support the mission of The Big Issue”
Some platforms also show external ratings for funds such as those issued by 3D Research which can help investors.
pay for green advice
If you’re happy to pay for advice you could hire a ‘green’ financial advisor to help to help you choose.
Mary Stevens of Friends of the Earth recommends the UK Sustainable Investment and Finance Association (UKSIF) which has a list of advisors who are verified and can be trusted to guide you to the funds that fit your values and goals.
It’s also worth using VouchedFor which has lists of financial advisors that have been recommended by other users. You can ask any you are interested in about their knowledge of, and interest in, ESG investing.
This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.