SNAPSHOT2 min read

How a new greenwashing clampdown could make sustainable investing more attractive

A new clampdown could give you greater confidence when investing in ESG products.

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On 12 December 2023, at the COP28 climate change conference, almost 200 countries signed an agreement to move away from fossil fuels and reduce carbon emissions.

The deal reflects a very real need for governments to support sustainable practices, yet some scientists argue that it doesn’t go far enough to reverse the effects of climate change. Fortunately, we can all make changes in our own lives to help reduce the damage we do to the planet.

Sustainable investing may be one effective way to do this. In fact, Lloyds [1] report that investing your pension in a green fund could be 21 times more effective at cutting your carbon footprint than going vegetarian, changing your energy provider, and giving up flying combined.

Climate change might not be the only issue that is important to you either. For example, you might want to support organisations that promote diversity and inclusion, pay a fair wage, and help to tackle social issues.

Environmental, social and governance (ESG) investments can help you make sure that decisions about your wealth align with your wider ethical values. These investments are chosen based on three areas:

  • Environmental – What action does the organisation take to reduce its effects on the environment? Does it help to further technology that protects the planet, or have a carbon neutral supply chain
  • Social – How does the organisation treat employees and partners? Has it taken action to promote diversity and inclusion around the globe, or is it socially responsible in its local area?
  • Governance – Is the organisation governed in a responsible way? Is there diversity at board level, or a clear anti-corruption policy in place?

Investments that perform well in these areas may be more in line with your values. Unfortunately, many investors have faced issues with “greenwashing” – companies or investment products claiming to be more sustainable than they are – in the past.

The good news is a new Financial Conduct Authority (FCA) clampdown aims to tackle this. Read on to find out how, and what this means for you.

New greenwashing regulations could give you more confidence about ESG investing

Some companies may knowingly misrepresent their green credentials and claim to operate in a more sustainable way than they do. Additionally, certain investment funds that present themselves as ESG-friendly may support companies that do not meet sustainability standards.

For instance, in May 2023 the Guardian [2] reported that BlackRock’s ACS Climate Transition World Equity Fund had $219 million invested in 10 of the 15 largest oil and gas companies in the world. This was despite the fact that the investment company claimed the fund aimed to support the transition to a low carbon economy.

In some cases, companies may be guilty of greenwashing without realising. For instance, in 2020, furniture manufacturer IKEA found itself embroiled in a scandal when it used wood that was unsustainably and illegally harvested, despite being told it met the company’s standards.

IKEA did not perform the necessary checks and, as a result, failed to meet its promise to operate in a sustainable way.

Unfortunately, a lack of regulation around the claims companies make about sustainability means that greenwashing, whether intentional or not, is very common. This could create issues for those who want to focus on ESG-friendly investments because companies or products may not align with their morals, despite presenting themselves as sustainable.

The good news is, the FCA recently published its long-awaited guidance about ESG investments to potentially reduce this risk.

As reported by FTAdviser [3], the FCA has created four specific labels to be used on ESG funds. These are:

  • Sustainability Focus – At least 70% of the funds must be invested in environmentally or socially sustainable assets.
  • Sustainability Improvers – These funds invest in assets that may not be sustainable now but have demonstrated they are taking action to be more sustainable in the future.
  • Sustainability Impact – This label applies to products that invest in specific solutions to environmental or social issues. They must “achieve pre-defined positive measurable impact”.
  • Sustainability Mixed Goals – These products have a combination of different sustainability goals and outcomes.

These labels could give you a clearer understanding of any ESG investments you may be considering. Additionally, they make it more difficult for products to label themselves as “green” without meeting certain criteria.

The FCA will also require messaging about ESG investments to be “fair, clear, and not misleading”. The regulator will have the power to take action against those who do not meet these standards.

Ultimately, this means that you can invest in ESG products with more confidence, and you may be less likely to be caught out by greenwashing in the future.

ESG options could outperform standard investments

A lot of people think that sustainable investments produce lower returns than traditional options. Investors may be willing to accept this because they want their investments to reflect their wider priorities.

Yet, a recent study shows that you might not have to make sacrifices after all because sustainable investments have the potential to generate higher returns than non-sustainable alternatives.

According to PensionsAge [4], the research compared the MSCI ACWI ex. Fossil Fuels Index, which excludes any fossil fuel companies, with the standard MSCI AWCI Index in the year to the end of October 2023.

The results showed that the index without fossil fuels grew by 6.99% while the standard index that includes oil and gas producers only saw 6.75% growth.

While past performance doesn’t guarantee future returns, this research suggests that ESG investments could perform as well as, or even better than other options. And, now that the new FCA guidelines have reduced the potential for greenwashing, you may feel more confident about sustainable investing in the future.

Get in touch

If you would like to discuss ESG investing, we can help you assess your options.

Please visit our contact page or speak to your adviser.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

[1] 18.12.2023 Why account for ESG factors when deciding where to invest? Lloyds

[2] 18.12.2023 FCA creates four sustainability labels and anti-greenwashing rule FTAdviser

[3] 18.12.2023 ‘Sustainable’ pension funds accused of greenwashing over billions held in oil and gas firms the Guardian

[4] 18.12.2023 Analysis shows fossil fuel-free investment plans can be more profitable PensionsAge

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

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