Could tougher rules help you avoid greenwashed ESG funds? Here’s what you need to know

You might have seen in the Guardian that the UK government’s long awaited climate strategy was criticised as being “half-baked, half-hearted”. It’s a depressing verdict, when we seem to be reading ever more alarming headlines about humanity’s impact on the climate.

If the issue of climate change is something you’re particularly concerned about, you may be considering using your wealth to reduce your personal impact on the planet. One way you can do this is to switch to “Environmental, Social and Governance (ESG)” funds, which aim to invest in businesses that are more socially and environmentally responsible.

According to Professional Adviser, which reported that more than 90% of financial advisers report to have spoken to clients about ESG funds. While this is good news, the spectre of “greenwashing” means many investors who would like to invest in ESG funds still don’t do so, something that the Financial Conduct Authority (FCA) is keen to address.

Read on to discover more about greenwashing, the steps the FCA may take to protect investors against it, and why some financial advisers may be less able to spot greenwashed funds.

Greenwashed companies look more environmentally responsible then they are

Greenwashing is when businesses make themselves appear more environmentally responsible than they really are. This is to attract investment from people who want to place money in companies that have less impact on society or the planet, or both.

Because of greenwashing, you may inadvertently invest in companies and funds that in reality, conflict with your aims and values. While suggesting that every ESG fund is greenwashed would be wrong, being able to spot investments that appear more responsible than they are can be extremely difficult.

This may be why research by Triodos Bank UK revealed that 26% of consumers would not invest in ESG funds because of fears that they may not be as ethical as claimed. Little wonder that the FCA is now considering ways it could help investors spot greenwashed funds and ensure ESG funds are as ethical as they claim.

Let’s consider this in more detail next.

The FCA could introduce regulations to tackle greenwashing

In June 2022, the sustainable news website Edie revealed that greenwashing had become such a concern for the FCA, that it signalled it could start regulating the firms that rate ESG funds. One area the city watchdog was particularly concerned about was the lack of access to credible information about the environmental, social and ethical impacts of the firms contained within ESG funds.

One reason for this, the article explained, is that there is no universal definition for ESG funds in the UK, which has led to ratings agencies using their own methodologies. As such, the definitions can vary, causing confusion for investors and financial planners trying to assess the funds.

With this in mind, the FCA has proposed a labelling regime in a bid to overcome the problem. While this may sound good in theory, an FTAdviser article published in February 2023 makes for interesting reading.

It reveals that claims by the Financial Inclusion Centre (FIC) that the FCA’s labelling system, which would categorise investment funds according to their environmental and social impact, still needs to be tougher.

Furthermore, the proposed system could confuse the different ESG goals of environmental and corporate responsibility, as well as social impact. This makes it difficult for investors to identify funds which meet their preferences.

A financial planner with experience in ESG funds could help you sidestep greenwashed funds

Against the backdrop of the FCA’s concerns, and whether it may be going far enough to address them, the abovementioned Professional Adviser article highlights a startling statistic. It reveals that just one-third of advisers have the right tools in place to support clients wanting to invest in ESG funds.

As such, those advisers who do not have the right tools in place or experience in dealing with ESG funds may find it harder to identify greenwashed investments. This might mean that your money goes into companies that have business practices that are contrary to your ethics or beliefs.

That’s why working with a financial planner who is experienced and has a deep understanding of ESG funds is so important. They could provide peace of mind that your investments are in line with the issues you feel strongly about and monitor your investments to ensure they continue to reflect your beliefs.

Get in touch

At Ardent, we have extensive experience working with ESG funds, so much so that it was recognised by New Model Adviser when it named us as a top 100 UK financial firm in 2021. This level of commitment to responsible investments means we have a deep understanding of ESGs, and are extremely diligent about the ones we use.

For example, we often work with London-based fund manager, EQ Investors, which has focused on sustainable investing since 2008. By working directly with the fund managers, we can ensure our client’s beliefs, ethics and investment ethos are adhered to when their money is invested.

This ability to understand exactly where our client’s money has been invested and why could help provide you with peace of mind that your money is in a bona fide ESG fund, and not one that’s greenwashed.

To find out more about our work with EQ Investors, please read our blog in which EQ Investor’s head of impact investing, Damien Lardoux, met and gave a presentation to our clients and their guests.

If you would like to discuss investing in ESG funds and how we might be able to help, please contact us on hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.

Get in touch

By talking about your current situation and listening to your aims, we create a personalised plan that will put you on a path to achieving your aspirations.

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