Finding ways to reduce our impact on the environment is increasingly becoming a priority. In July 2023, the Office for National Statistics (ONS) reported that 86.5% of UK adults had made some changes to their lifestyle to help tackle environmental problems.
You may fall into this group, and there are several ways you could mitigate the effect that you have on the environment such as driving less, reducing energy usage at home, or changing your diet.
However, the way that you hold and invest your wealth could also have a significant effect on your carbon footprint.
For example, according to the National Bureau of Economic Research (NBER), a recent study considered the carbon emissions of 685 publicly traded US companies. The research also monitored the pension fund holdings for 24 of the largest US pension funds.
The findings showed that a 1% increase in the shares owned by green pension funds was associated with a 3.1% decrease in carbon emissions from the companies in the study.
As such, if you want to live a more environmentally friendly lifestyle, you might consider sustainable investments. If so, you may need to be aware of new “greenwashing” regulations introduced by the Financial Conduct Authority (FCA).
Read on to learn more.
“Environmental, social, and governance” ratings allow you to choose investments that align with your values
If you want to be more sustainable with your wealth, you may consider environmental, social, and governance (ESG) investments.
These investment criteria are assessed as follows:
- Environmental – How a company’s operations affect the environment and whether they take steps to reduce this, such as managing carbon emissions. Companies that produce “green” products such as solar panels may also score well in this area.
- Social – How well a company treats its employees and the wider community. This might include workers rights, pay, or any charity work in the local area.
- Governance – How ethical the company structure is. Issues such as conflicts of interest, accounting practices, and tax strategies will all be considered here.
Companies or funds receive an ESG score, making it easier for you to choose investments that align with your values.
However, in the past, there was no official framework for ESG scores, and the ratings varied depending on the organisation that assigned them. Additionally, ESG funds often faced claims of “greenwashing”.
“Greenwashing” could mean that investments are not as ethical as they appear
Companies may be accused of “greenwashing” if they make misleading or deliberately false claims about sustainability or ethical practices.
For example, according to the Sustainable Fashion Forum, clothing retailer H&M was sued for using labelling and marketing campaigns that were “designed to mislead consumers through the use of false environmental sustainability profiles”.
The company was also accused of inflating its recycling capabilities and suggesting that the majority of the garments it sold would be repurposed, when this simply wasn’t the case.
Unfortunately, this kind of greenwashing has become more common as brands try to capitalise on our desire to protect the environment. As such, it can be difficult to know if a company that you invest in is really as ethical as it claims to be.
The same could be true of ESG funds too. In March 2022, the Harvard Business Review reported that researchers compared the sustainability record of US companies in 147 ESG fund portfolios with 2,482 non-ESG portfolios.
They found that the companies in the ESG funds actually had a worse compliance record for labour laws and environmental rules than those in the non-ESG funds.
Additionally, in 2023, the Guardian revealed that BlackRock’s ACS Climate Transition World Equity Fund – which claims to invest in companies that support the transition to a low-carbon economy – invested $219 million in 10 of the 15 leading oil and gas companies.
The FCA recognised this problem and introduced new guidelines to help prevent greenwashing and allow you to make more informed investment decisions.
The Financial Conduct Authority rules about labelling and marketing ESG funds allow you to invest with confidence
The new guidelines published by the FCA came into effect on 31 May 2024. Since then, any firms promoting sustainable investments must do so in accordance with the new rules.
All sustainability claims must be “fair, transparent, and not misleading”. There are also new rules about naming funds, so a provider must meet certain conditions before they can use “green” terminology to describe a product.
Any firms found to be breaking these guidelines could face consequences including fines and may potentially be obliged to refund customers.
As a result, you can have more confidence that the sustainability claims ESG funds make are accurate and the investments align with your ethical values.
A new labelling framework may make it easier to compare ESG investments
The FCA also introduced a new labelling system to improve clarity and transparency around ESG investments.
The new labels, which came into effect on 31 July 2024, are:
- Sustainability Focus – A fund that invests primarily in companies that operate sustainably. This might include businesses that use renewable energy or improved recycling practices, for instance.
- Sustainability Improvers – A fund that invests heavily in assets that are not currently sustainable but aim to improve their green credentials. This could include companies that are actively making changes to achieve net zero in the future.
- Sustainability Impact – A fund that invests in assets that directly contribute to solving environmental problems. For example, companies developing new renewable energy or water purification technology.
- Sustainability Mixed Goals – A fund that invests in companies with a mixture of the credentials outlined by other labels.
These labels could benefit you because you can decide what kind of sustainable investments you want to focus on, rather than simply investing in funds that make vague claims about being “green”.
The new FCA guidelines don’t entirely solve the problem of greenwashing
The new FCA rules could be incredibly useful for you as an investor because they give you more confidence that the sustainability claims that companies or funds make are accurate.
However, that doesn’t mean greenwashing is no longer a problem and some companies could still be misleading about the effects they have on the environment.
That’s why it’s still important to ensure that investments align with your ethical values as well as your attitude to risk and long-term financial goals. We can support you here by performing due diligence on your investments.
Get in touch
We can support you in building an investment portfolio that is suitable for your financial plan and aligns with your values.
Please contact us at hello@ardentuk.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
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.
