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Sustainable investment trends – performance, flows and greenwashing

environmental protection image
  • Sustainable funds are on course for another record-breaking year of sales
  • Ethical funds have outperformed in Global and UK sectors
  • But an ‘ESG premium’ is hard to prove
  • Greenwashing claims stem from routine fund management practices being rebranded as ESG integration, and a variety of interpretations of what constitutes ethical investing
  • Most popular ESG funds with DIY investors

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“There’s no doubting the strength of the sustainable investment tide, as last year responsible funds accounted for around a third of overall industry sales. This year looks set to be even bigger, and on current trends will eclipse 2020 to post a new record for ethical fund sales. These funds still only make up around 5% of total assets, so there’s plenty of road ahead for ESG funds to eat the lunch of more traditional offerings.

“Perhaps that’s why almost all fund groups seem to be beefing up their sustainable investment credentials, even for funds which look to be stretching quite hard for the ESG tag. The reality is that routine fund management practices can legitimately be characterised as ESG integration, they just never used to be called that. Even so, some of the resulting portfolios would likely leave sustainable investors scratching their heads as to why their money is being funnelled into oil companies and tobacco stocks.

“The situation is not helped by a variety of approaches to ethical investing, with some funds simply tilting away from the worst ESG offenders, others entirely excluding them, and some funds actually seeking out companies having a positive impact on environmental and social issues. Industries themselves are also taking positive action to curb less palatable practices, for instance, BP is aiming to be a net zero company by 2050, and Philip Morris has committed to a smoke-free future. Some investors still won’t want these stocks, but for others, transitioning may constitute enough for inclusion in a sustainable portfolio. After all, the recent petrol pump crisis demonstrates most of us still use the products of the likes of Shell and BP, so why penalise them at the stock exchange but not the forecourt?

“For the moment, the answer is for investors to do some extra homework when choosing sustainable funds and look under the bonnet to check that the ESG approach matches up with their expectations. Ethical investing comes with a wide variety of interpretations, both from investors and fund groups, and the key is for investors to select funds whose investment policies marry up with their own ESG principles. Given the significant number of ESG fund launches we have seen in recent years, there is at least an increasing choice available which helps investors do just that.”

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