Invest in ESG funds but watch out for greenwashing

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ESG funds are doing well but beware the misdescriptions

The straightforward message by financial advisers today is that it pays to invest in ESG funds because they are doing very well against mainstream funds but you have to watch out for the growing problem of greenwashing which is where fund groups label funds as green and ethical but which on scrutiny do not live up to that description.

ESG funds are doing well but beware the misdescriptions

ESG funds are doing well but beware the misdescriptions. Image: Consultancy.Asia

It appears that the coronavirus pandemic has sharpened an awareness of the benefits of investing in ESG funds rather than turning investors away from ESG. Between 2015 and 2018 there were zero monthly inflows into ESG funds. Things started to change in 2019 when investments rose tenfold between the third quarter of 2019 in the third quarter of 2020.

To be clear, “ESG” stands for environmental, social and governance issues. In other words you hope to invest in businesses with an ethical approach to (1) the environment, (2) their impact on society and (3) how they run the business i.e. governance.

It is reported that UK investors invested £588 million net into ESG equity funds in September which is a new record. In 2020, so far, funds have had a net inflow of £2.6 billion. Over this period mainstream non-ESG funds had an inflow of £192 million.

The FTSE4Good index of ethical stocks has beaten the FTSE 100 index of leading UK stocks over one, three and five years.

The danger is that ESG has become a marketing tool which, as mentioned, can lead to misleading investors with incorrect descriptions of funds being green. Investors should check their fund portfolio or at least scrutinise with some vigour the portfolio set up by their financial adviser and fund manager. I would be very cynical and ask pertinent questions. Dig around a bit because the bottom line is you cannot trust businesses or fund managers unless of course they are genuine ESG businesses.