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Sustainable investments are all the rage but sometimes they are not what they appear to be
Thursday 01 Apr 2021 Author: Ian Conway

If the 2010s represented the temperamental teenage years of sustainable and ethical investing, 2020 marked its ‘rite of passage’ to adulthood. During the first quarter of 2020, even as markets around the world nosedived and global fund outflows hit $385 billion, sustainable funds saw net inflows of $45.6 billion according to Morningstar.

As the industry matures there are those who can imagine a time when labels like sustainable and ethical are no longer needed, when doing the right thing by the environment and society in general are just seen as normal business behaviour.

However, that is still a long way off and the financial industry faces rising claims of ‘greenwashing’, or faking ESG credentials to secure investors’ cash.

In this article we discuss the challenges of spotting genuinely sustainable investments and flag two ESG funds for investors to buy today.


The charge of greenwashing has credibility because it is increasingly being levelled by seasoned insiders. A big issue here is a lack of consistency amongst those who set themselves up as the arbiters of sustainability – the ratings agencies, the investment banks and institutional investors themselves.

The incentive for being perceived as an ESG-friendly investment is increasingly clear. Being a sustainable businesses is a source of outperformance for companies. No longer does ‘doing the right thing’ carry a cost in terms of returns.

In exhaustive research in 2015 into more than 2,000 empirical studies of returns on sustainable investing (‘ESG and financial performance’), German academics Alexander Bassen, Timo Busch and Gunnar Friede concluded that 90% of studies found a ‘non-negative’ (meaning equal or positive) correlation between ESG criteria and corporate financial performance, while a majority of studies found a positive correlation.

With green stocks more popular than ever among investors, launching new funds – or rebranding old funds – as sustainable, responsible, green or impact has also become a highly successful and lucrative way for institutions to gather assets.

Since the United Nations launched its Principles for Responsible Investment in 2006, the number of financial organisations which have signed up has risen from 734 in 2010 to 3,038 as of April 2020. These firms are responsible for total assets under management of $103 trillion against $21 trillion just over a decade ago.

The problem for investors is that the definition of what constitutes a sustainable business can vary wildly from one fund to another, so finding funds and managers which actually do what they say on the tin is getting harder.

Telltale signs of greenwashing

• Use of buzzwords like sustainable, green or ethical without any explanation in plain English of what they mean.

• Not discussing ESG investments in their proper context – i.e. highlighting an apparently eye-catching outlay on a sustainable project and ignoring the much larger sums spent on fossil fuel operations.

• Setting ambitious targets with openended or very distant cut-off points.

• Heavy use of carbon


According to investment bank Morgan Stanley, 85% of individual investors are interested in sustainable investing, an increase of 10 percentage points in the last five years.

Even though many have faced unemployment, reduced working hours or a difficult financial situation over the past year, a large minority of younger people have found themselves with money to spare from not spending as much during the pandemic and have realised the need to invest for their long-term future.

This younger generation wants to use their money in a way which is aligned with their values and creates positive social and environmental change, as well as providing long-term financial security.

However, the lack of transparency and industry-wide standardisation in the sustainable and ethical fund industry means there is too much ‘greenwashing’ going on.

It isn’t just the younger generation who are speaking out, either. The former chief investment officer of sustainable investing at BlackRock penned an op-ed in US newspaper USA Today claiming the financial services industry was ‘duping’ investors when it came to sustainability.

In the column, Tariq Fancy wrote: ‘This multi trillion-dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it. I believe we are doing irreversible harm by stalling and greenwashing. And all in the name of profits.’

Many mutual funds which were rebranded as ‘green’ had no discernible change to their underlying strategies, claimed Tariq, and the change in name or branding was simply for the sake of ‘virtue signaling’.

BlackRock itself said the firm condemned ‘greenwashing’ but added that greater corporate reporting and increased regulations would be needed to enforce change.


Kate Capocci, lead ESG expert and fund manager at Smith & Williamson Investment Management, outlines the three approaches the fund industry typically takes as Exclusive, Inclusive and Impact.

Exclusive is the old approach to screening for sustainable investments, basically filtering out companies which ‘do harm’ such as oil, mining, defence, tobacco and gambling.

Inclusive is a more recent approach and uses positive screening to find best-in-class businesses and sustainable business practices, while the Impact approach uses money invested to generate a measurable positive impact on society or the environment.

Still, as Capocci points out, there are major issues in the disparity of data across geographies and among firms of different sizes, added to which some data is not readily available while other data can be inaccurate or of low quality.

Last month the European Union introduced what it hoped would be the ‘silver bullet’. The Sustainable Finance Disclosure Regulation (SFDR), which applies at both an entity and product level, is aimed at stopping ‘greenwashing’ through the whole investment value chain, including advisers, asset managers, pension funds and insurers.

In a nutshell, products which take no account of ESG criteria will have to say so. Products that claim to promote an environmental or social agenda will need to state the extent to which those are met, and products with sustainable investment objectives will need to disclose precisely which objectives they contribute to and what percentage of their investments relate to those objectives.

This could have become a framework for global standardization, however, in a show of one-upmanship, the US Securities and Exchange Commission has just announced it is setting up its own task force to tackle ‘greenwashing’ and has hinted it plans to set out a standardized and mandatory set of ESG disclosures.


The ratings agencies are no better it seems when it comes to choosing their criteria for ranking companies according to ESG factors. In a 2019 research paper The devil is in the details: the divergence in ESG data and implications for responsible investing, researchers Mike LaBella, Josh Russell and Dmitry Novikov routinely found differences of as much as 50% between the ESG ratings of individual stocks among different agencies.

Using data for six mega-cap US stocks –, Apple, Berkshire Hathaway, Facebook, JPMorgan and Microsoft – where in theory there should be enough accurate data to satisfy the most exacting criteria, the researchers found statistically significant variances in five of the six examples with only Microsoft displaying any kind of consistency between the agencies.

Digging into the data further, one of the agencies was consistently low with its scores and one was consistently high, making comparison all but useless.

As Matt Timmins, joint chief executive of business services firm Fintel (FNTL) points out, when it comes to ranking stocks on social criteria specifically, the difference between agencies is even more marked but less quantifiable, making comparison even more difficult.

For example, on the issue of birth control – relevant for Durex maker Reckitt (RB.) – ‘house views can range from totally unacceptable on one hand to an inalienable human right on the other’, says Timmins.

Similarly, on the impact of biofuel production, views range from positive (reducing carbon emissions) to deeply negative (loss of biodiversity, causes food poverty).

‘The pinnacle of this confusion has to be Tesla’, says Pan Andreas, head of insight and consulting at Defaqto, part of Fintel. ‘One major agency rates Tesla very highly, simply on the basis its vehicles are emission-free, whereas another rates it extremely poorly because the life-cycle cost to the environment of producing battery-electric vehicles is so high.

‘Add in claims of poor working practices and a decision to accept payment in bitcoin – which is heating up the planet as it is being mined – and no wonder it scores badly. So how do you rate a fund with a big stake in the stock?’, asks Andreas.


For investors who want to buy funds with clearly established rules on what they will and won’t need invest in, which share their values and genuinely aim for sustainability, we recommend the following open-ended and closed-end options.

WHEB Sustainability Fund Acc (B8HPRW4) 276p

Net assets: £810 million

WHEB is a specialist asset management firm with a single global equity strategy focused on solutions to sustainability challenges. The fund invests in stocks which produce cleaner energy, provide environmental services and resource efficiency, but it also owns stocks which promote health, well-being, safety and education, and it can quantify the positive impact of its investments.

Manager Ted Franks takes an uncompromising approach, only selecting companies which already have sustainable growth qualities and not engaging with companies which are ‘in transition’ like most funds. As a result, his holdings tend to be higher-growth and higher-return than many supposedly sustainable funds.

Schroder BSC Social Impact Trust (SBSI) 103.5p

Market cap: £78 million

The Social Impact Trust is a collaboration between fund management giant Schroders (SDR) and dedicated social impact investor Big Society Capital which gives individual investors access to a portfolio of high-impact private market sustainable solutions.

The trust, which launched in December, targets sustainable returns with a demonstrable social impact and a low correlation with traditional financial and public markets.

So far the fund has invested just over £39 million, or 55% of the capital it raised at its IPO, across social housing, charity bonds and green bonds, and has undrawn banking commitments of just under £20 million in the event that it becomes fully invested and then finds further opportunities.


Another dilemma for investors is should they invest directly in a sustainable or green fund, or should they invest in the management company? While buying the fund might be ‘doing the right thing’, in some cases the management company makes for a better investment.

Take Impax Environmental Markets (IEM) and Impax Asset Management (IPX:AIM). The £1.2 billion fund grew its net asset value by an impressive 41% in the 12 months to the end of February, while its shares gained 45.2% compared with a 19% gain for the MSCI All Countries World Index in sterling, demonstrating the considerable returns which can be achieved by investing in sustainable assets.

However, the £950 million market-cap asset manager saw its shares gain 110% in the 12 months to the end of February or more than double the gain for its flagship fund.

In fact, this makes perfect sense. Impax has been increasing its assets under management, which by the end of December stood at a record £25.2 billion, through a combination of M&A, net inflows and good performance. The manager gets paid a flat-rate ‘ongoing charge’ or management fee on each of its funds, which rises with the volume of assets in the funds.

This isn’t an isolated case, either. Investors in Gresham House Energy Storage Fund (GRID) have seen the value of their holding rise by just 6.7% in the year to February, during which time the fund has grown its capacity to 350 megawatts making it the UK’s largest operational utility-scale battery storage fund.

Which is all well and good, until you discover that the same investment in parent company Gresham House (GHE:AIM) made nearly 40% over the same period as assets under management last year ballooned 40% to £3.9bn, earning the firm lots of lucrative fees.

Rather like during the California gold rush, it often pays to own shares in the firms selling picks and shovels rather than those doing the digging.

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