Investment and pension funds are set to face closer scrutiny when they label investments as “sustainable”. For investors who want to consider ESG (environmental, social, and governance) factors, it could make selecting investments more straightforward.

Regulators getting tough on how products are marketed follows growing concerns about “greenwashing”.

When a company makes exaggerated or misleading claims about improving its environmental impact, it’s known as greenwashing. It could also include making broad claims without providing any evidence.

While it often focuses on the environment, there have been instances where firms have exaggerated initiatives in other areas, such as the positive impact they have on local communities.

Greenwashing can present challenges for investors who want to invest in companies that reflect their values. It can make it difficult to be confident that your portfolio meets your criteria.

Greenwashing also occurs in funds. For example, you may assume that a fund labelled “green” or “sustainable” doesn’t invest in industries that contribute to climate change. However, this isn’t always the case.

Think tank Carbon Tracker found pension funds that claim to have green credentials have invested in some of the world’s largest fossil fuel companies. More than 160 pension funds with a green label held $4.6 billion (£3.71 billion) in 15 companies, including ExxonMobil and Chevron.

Among those funds, 25 were members of the Net Zero Asset Management initiative, and some even increased their holdings in 2022.

One fund claimed to invest in companies “well-positioned to maximise the opportunities and minimise the potential risks associated with a transition to a low-carbon economy”.

As an investor, it would be reasonable to assume the fund avoids investing in oil and gas companies with a statement like this. Yet, the fund had $219 million (£176 million) in 10 of the 15 fossil fuel companies assessed in the research.

The Advertising Standards Authority will scrutinise terms like “carbon neutral”

One of the challenges of ESG investing is that terms like “carbon neutral” and “nature positive” aren’t clearly defined. So, it’s possible for companies to use them in a misleading way or for consumers to make inaccurate assumptions.

According to the Guardian, the Advertising Standards Authority is set to introduce much stricter rules over how companies can tell consumers about their role in the climate crisis and loss of nature. The reports suggest organisations will have to reconsider their relationship with major polluters when deciding how to advertise.

The rules will apply to advertising across all industries, but it could have significant implications for investment funds. When they are introduced, some funds may have to reassess how they are labelled.

ESG investors should look closer at sustainable labels

While greater regulation around how companies label funds is a step in the right direction, there’s still a long way to go.

Definitions around what a “responsible” or “ethical” fund means aren’t standardised, so investors who have clear views about what they do or don’t want to invest in need to look beyond labels. If ESG factors are important to you, here are some steps you can take to reduce the risk of greenwashing affecting your portfolio:

  • Set out what values are important to you. Listing your ESG priorities can make it easier to assess which funds are right for you.
  • Read the fund’s strategy and disclosure documents. Don’t assume that a fund that is labelled “sustainable” will align with your views. Take some time to read the documents provided to understand its strategy and priorities.
  • Take a look at the fund’s holdings. Some funds will disclose their full holdings, while others will provide their top 10. Scrutinising this list can help you assess if the fund invests in a way that aligns with its strategy.
  • Review how the fund engages with companies. Engaging with companies and voting at annual general meetings is an important way funds can encourage better business practices. Many funds publish their voting records for you to review.
  • Consider how transparent the fund is. Transparency can build trust if you’re worried about greenwashing. So, consider how easy it is to access information about the fund.

Researching ESG investing can take time and resources and, of course, you also need to weigh up if a fund is right for your financial goals. Working with a financial planner could help you identify which ESG funds may fit into your portfolio.

Want to make ESG concerns part of your investment portfolio?

If you want to incorporate ESG issues into your investment decisions, get in touch. We can help you assess investment opportunities with your values, and financial goals, in mind.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.