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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
It’s pretty much impossible to avoid ‘sustainable investing’ right now. 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.
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.”
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.
There are two ways to invest in environmentally-friendly funds:
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.
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.
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.
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.”
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.”
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.”
Look to see if a lot of the companies invested in are propped up by Government subsidies.
Investment platforms such as AJ Bell, 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.
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.