Ethical investing was once one of the biggest financial buzzwords, but new figures reveal investors are now pulling money from such funds. BETHANY WALES spoke to experts about why we’re turning our back on ‘woke’ investing.
Environmental, social and governance (ESG) investments have rapidly grown in popularity over the last few years.
In fact, East Anglia-based financial planners Lovewell Blake found that, for some, ethical considerations had started to rank alongside security and performance.
But last month, that all changed.
In July, the outflows from ESG equity funds hit £376m, the largest on record, according to the latest Fund Flow Index from the global funds network.
And while this might come as a surprise given the growing awareness of environmental and social issues, increasing scepticism about the credibility of ESG certifications could be to blame.
Greenwashing
Greenwashing, the practice of misleading consumers about the environmental benefits of a company or product, has become a common concern for investors.
At the start of this year, the EU tightened the rules on how funds have to report on their socially responsible screening processes.
As a result, Radostina Dencheva, a chartered wealth manager at Norwich-based Chadwicks, said funds which had been getting away with overstating their ethical and green credentials had been exposed, causing a crisis of confidence among investors in the UK.
Ms Dencheva said: “Whereas before they had flexibility to put the label of being SRI funds without applying very strict processes, they now have to meet certain requirements holding a certain percentage of companies that meet the new criteria.
“That’s added fuel to the fears about whether ESG funds are as good as they claim to be.”
Next quarter, the UK’s Financial Conduct Authority is expected to announce its own policy relating to the Sustainability Disclosure Requirements.
And although this might trigger increased outflow in the short-term, Ms Dencheva said in the long run, a move towards tighter regulation was a positive thing for investors.
She said: “The whole point of this is to avoid greenwashing, and although its too early to say what difference it will make, it’s a move in the right direction.
“More transparency will help people understand what exactly their investment means, which over time will boost confidence.”
Minority interest
However, concerns about greenwashing aren't the only thing fuelling the investor exodus.
Andrew Spaxman, a paraplanner at Lovewell Blake, said although interest in this type of investing has grown, it remains a minority interest.
He said: “While it is commonplace for investors to request that they avoid certain sectors such as arms manufacturers and tobacco producers, the avoidance of fossil fuels corporations is not being added to the list in any significant way.
“Large oil and gas companies have performed pretty well over recent years, and this has been a factor in people retaining them in their portfolios.”
However, he said change was on the horizon: “Given that green energy is going to be the future, there are sound financial reasons to invest in this sector, too.
“The chances are that fossil fuels will face increased taxation, alongside growing government subsidies and incentives for green energy initiatives.
“It could well be that what is currently perceived as an ‘ethical penalty’ when it comes to investment performance may in time evolve into an ‘ethical premium’.
“Ultimately that will be what will drive mainstream investors away from traditional fossil fuel investments and into new green energy opportunities.”
What is ESG investing?
Environmental, social, and governance (ESG) is a set of aspects considered when investing in companies, which recommends taking environmental issues, social issues and corporate governance issues into account.
Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change.
Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Many mutual funds, brokerage firms, and robo-advisors now offer investment products that employ ESG principles.
Some have argued that, in addition to their social value, ESG criteria can help investors avoid the blowups that occur when companies operating in a risky or unethical manner are ultimately held accountable for its consequences.
However, the rapid growth of ESG investment funds in recent years has led to claims that companies have been insincere or misleading in touting their ESG accomplishments.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here