Environmental, Social and Governance investing, known as ESG, has become increasingly popular over recent years. In fact, the latest estimates are that worldwide, £810 trillion are invested in ESG funds, so its big business!
ESG investing has become more popular in particular as people have become more concerned about green issues and ethics. The problem is how ESG credentials are measured and monitored to ensure that funds really are doing what they say they are. This has led to the coining of the term “greenwashing” to describe practices which describe themselves as green, but in reality, are often the opposite. So how do you check?
Most funds now declare a whole host of different ratings which the industry seems to have created, but it really is difficult to be sure. The recent press about Boohoo is a good example. Boohoo stock is held by a number of prominent ESG funds, but that didn’t stop the Sunday Times uncovering their alledged sharp practice of underpaying staff, leaving ESG fund managers with egg on their faces. Another good recent example is Tesla. Tesla is ranked by one ratings agency as the top car maker globally on the back of its green clean technology, whilst the FTSE ranks as almost the worst on the basis of the emissions from its factories, so how do you make a judgement call on which is the right view?
These are both examples of just how difficult it is for advisers to be sure about the veracity of ESG funds and shows just how important it is that clients provide clear instructions about their ESG priorities, for example are you concerned about emission or clean technology?
Its clear that the FCA probably needs to look more closely at this sector and set clearer requirements for rating ESG funds. In the meantime, advisers will do their best as always.