Advisers have increasingly looked to sustainable portfolios for clients.
However, with £124m a week on average placed into sustainable funds in the first nine months of 2019, there is an increased risk that products will not always do what they say on the tin.
The phenomenon of funds, or of individual companies in any sector, talking up their green credentials in order to attract capital is widely known as greenwashing.
Katherine Davidson, a portfolio manager for sustainable equities at Schroders, says: “In many ways we have gone from too little data to too much: firms now publish plenty of metrics, but with lots of small print.
“The key is to really read that, and then, if need be, to go back to the company and query anything with them.”
Key points
- Greenwashing is a danger for novice ESG investors
- This happens when 'sustainable' does not form a key part of the business activities
- It can be mitigated through research
The practices she notes includes companies promoting the sustainable activities of some of its subsidiaries, but not breaking down the overall activities of the parent company.
An example of this might be a large oil company that promotes the renewable energy business it has, but continues to invest in, and generate profits from, its traditional fossil fuel operations.
Louis Florentin-Lee, portfolio manager for the Lazard Global Sustainable Equity Select Strategy, says: “For us, greenwashing occurs when ‘sustainable’ endeavours do not form a material part of the current or envisaged future activities of the business, or when they are undertaken without a profit motive.
“In these circumstances, they may be construed as token gestures.”
He adds: “We are interested in companies where the move to a more sustainable world is positively impacting their ability to generate profits.
“We believe that consumers, governments and businesses want to transition to a greener, healthier, safer and fairer world.
“In doing so, this will materially impact the demand for some companies’ products and services.”
Fundamental conditions
Mr Florentin-Lee says: “In order to form part of our sustainability portfolio, a company must meet two fundamental conditions: firstly, a ‘sustainable’ company is one that can take advantage of these shifts in demand by offering products or services that will facilitate that transition; and secondly, the company must do what it can to minimise the negative externalities that their business creates.”
He says it is important that both conditions are met. It is not enough for a company to ‘offset’ the negative impact of its business through charitable or environmental donations elsewhere.
Equally, he adds, a business selling the most environmentally friendly products needs to manage their business and supply chain responsibly.
“An oil company does not qualify as ‘sustainable’ just by donating money to some of the communities in which it operates; neither does an electric vehicle company if it uses child labour in its supply chain.”
