Greenwashing: when is sustainable not responsible?
Responsible investing has become so popular that many fund managers want to get in on the action. But just because a fund is called sustainable or ethical… is it really? It’s great that responsible investing is becoming more popular. It means that more money is being invested in companies that do good for people and…
Responsible investing has become so popular that many fund managers want to get in on the action. But just because a fund is called sustainable or ethical… is it really?
It’s great that responsible investing is becoming more
popular. It means that more money is being invested in companies that do good
for people and planet such as renewable energy, ethical supply chains and
medical innovations that help society. At the same time, people are divesting
from industries that cause harm including fossil fuels, gambling and tobacco.
But with all this money flowing, some funds are using misleading names and
commentary, and the universe of responsible investments is becoming tainted by
What is greenwashing?
Greenwashing by funds is the practice of making
unsubstantiated or misleading claims about the sustainability or environmental
benefits of their investment products. Just because a fund uses the term
ethical, sustainable, green or responsible in its description, or claims to be
fossil fuel free, does not mean this is the case.
Many responsible investment funds use a screening process to
avoid harmful companies. But these screens vary widely between funds and often
have exposure limits. In other words, a fund might screen out fossil fuel
companies but only if their revenue from fossil fuels exceeds 20%, for example.
They will claim to screen out fossil fuels, but a closer look shows some of
these companies have made it into the portfolio. If you invest in the fund, you
may unknowingly be supporting an issue that you feel strongly against.
A financial adviser can help you understand these funds and
how true-to-label they are, so you know your money is ending up with companies
that align with your values.
How can a financial
adviser help you to avoid greenwashing?
There are a few key things an adviser will look out for when
First, does the fund make it publicly available what
companies they’re investing in? Many funds will provide a list of their
investment holdings, usually in arrears to protect their portfolio. If the fund
only supplies the top ten holdings, it’s difficult to know how responsible it
is. Funds often provide a full copy to a financial adviser on request.
Second, is the fund’s voting history publicly available and what
are they supporting? As (usually large) shareholders, fund managers can vote on
resolutions for the companies they hold and significantly impact results. Are
they voting for or against issues such as climate change or human rights?
Again, funds are often willing to disclose their voting record to advisers.
Third, how engaged is the fund with the companies it invests
in? As well as voting, funds can meet with companies and use their influence to
get boards to improve sustainability practices. An adviser can regularly speak
with fund managers to really understand this engagement process.
What are some
examples of funds doing the right thing?
BetaShares has an Australian exchange traded fund (FAIR) that
uses strong screening with a 0% tolerance on many harmful issues including
fossil fuels, animal cruelty and destruction of valuable environments. They
even exclude companies for payday lending or lack of gender diversity on the
board. As well as negative screens, FAIR incorporates positive screening as the
fund preferences companies that are leaders in sustainability such as
renewables, recycling and water efficiency. However, their voting record is not
Future Super excludes companies involved in fossil fuels,
gambling, tobacco, live animal exports and many other ethical concerns
including poor corporate governance and male only boards. They have transparent
investment holdings and a public voting record. They also have a positive
screening process resulting in exposure to renewables and energy efficiency.
Is there a list of
responsible funds that I can choose from?
The Responsible Investment Association of Australasia (RIAA)
has developed a tool called Responsible
Returns to search for funds available in Australia and New Zealand. You can
select the top two issues you’d like to support such as Sustainable water or
Impact investments. You then choose the top two issues you want to avoid such
as Fossil fuels and Tobacco. It lets you decide the kind of product, e.g.
investment or super, and if you want to invest in Australia or New Zealand. The
results will show all the providers that match your search. This is a good
starting point but be aware that some of the products shown may have low levels
of screening. This means that the investment holdings of these funds may not
actually align with your values.
The Ethical Advisers’ Co-operative (EAC) have just released
their green leaf ratings for a selection of managed investment and super funds.
These ratings are based on the quality of the underlying investments,
transparency and disclosure including voting, as well as proof of engagement;
funds should vote and engage with the companies to create positive change. The
ratings are designed to shine a light on greenwashing and reward funds that are
doing the right thing. The Ethical Fund
Ratings are based solely on the ethics and sustainability of the funds and
do not include financial information.
There’s a lot of variation between responsible investing
products and it’s a good idea to seek professional advice to protect yourself
Want to know more?
Speak to me about how responsible funds may work in
conjunction with your overall financial plan.
information is general in nature only it does not take into account your
individual circumstances. We recommend that you seek professional advice before
making any investment decision.