New rules will be introduced to stop the ‘greenwashing’ of investment products, which should make it easier to find funds and trusts that align with your values.
The money in your investments, savings or pension could have an impact on the planet, with some investments funding oil firms, tobacco or arms companies - and others helping the move to net zero.
The Financial Conduct Authority (FCA) has proposed a series of three labels for sustainable investments, which will have to meet certain standards.
It's also set out strict controls on the use of terms such as ‘Environmental, Social and Governance (ESG)’, and an anti-greenwashing rule to stop financial firms making claims about their environmental impact that aren’t backed up by reality.
The proposals come after Which? warned that consumers were being left in the dark about what they were investing in, due to widespread use of misleading jargon and poor-quality data.
Here we explain what the FCA is proposing and how to find investments that suit you and your beliefs.
Where is your money invested?
Four in five adults would like their money to do some good while it’s invested, as well as making a return, according to FCA data.
Once a niche area, sustainable investing is now big business; £16bn was poured into ‘responsible funds’ last year.
But what counts as sustainable or responsible isn’t always clear, and its remit keeps on changing. More than one thousand investment funds had their ESG label removed by data provider Morningstar in 2021, with 536 products rebranded as ESG that year.
The lack of agreed standards has meant some could end up with investments they didn’t agree with, while others could be put off picking sustainable investments altogether.
In a survey of investors earlier this year, we found many underestimated the likelihood their money is in fossil fuels and didn’t understand their funds’ strategies.
Our previous research has shown that people struggle to distinguish between sustainable investing terms, raising the chance they’ll invest in a product they wouldn’t be happy with or not invest at all.
The FCA wants to make it easier for consumers to compare sustainable investments - which should increase competition in the industry and protect consumers from greenwashing.
More trust in sustainable investments should mean more money for companies creating positive changes, from wind farms to social housing.
- Find out more: the murky world of green funds
Labels for sustainable investments
From 'ESG' to 'negative screening' and 'SRI' - there are nearly a dozen terms that refer to investing in line with your values.
Under the FCA’s proposed rules, investment products will be able to use just three labels or must refrain from sustainability claims altogether:
Sustainable focus
Aimed at investors who want to avoid certain industries. Sustainable focus funds and investment trusts must be at least 70% invested in assets (ie companies or government bonds) that meet a credible standard of environmental and/or social sustainability.
Sustainable improvers
For investors who aim to improve certain companies by owning them. Sustainable improver funds and trusts must clearly state where they will and won’t invest, their policies to influence companies and how they’ve influenced firms.
Sustainable impact
Aimed at investors who want their money to drive real-world changes. Sustainable impact funds and trusts have to articulate a theory of change, show they’re investing in line with it and disclose their progress in driving change.
Crackdown on greenwashing
Both the FCA and Which? have repeatedly warned about the 'greenwashing' of investments, where funds and trusts are made to look more environmentally friendly than they are.
One major point of confusion is ESG. Considering ESG when investing could mean a fund manager is taking into account the effects of, for instance, climate change when deciding where to invest - but isn’t doing anything to halt climate change.
This wouldn’t be enough to qualify for one of the above labels, says the FCA. It wants to control the use of such terms as ESG, sustainable, responsible, green or net zero - among others.
If the FCA gets its way, all financial firms will be banned from greenwashing, which would affect the marketing of a wider range of products, including savings accounts - some of which are far more environmentally friendly than others.
All investment firms will be required to disclose a product’s sustainability objective, investment approach and performance against the objective.
The FCA now intends to develop rules governing how financial advisers take sustainability into account. This is important, because we previously found 40% of Which? members with ethical investments found out about them via a financial adviser.
- Find out more: the most sustainable savings accounts revealed
How to find investments you agree with
The FCA will now seek industry views on its plans - with the earliest possible date for anti-greenwashing rules to be June 2023 and fund labels to come in 2024.
Until then, you’ll have to do your own research - here are our suggestions on what to look for.
Check the holdings
If there’s a company you don’t agree with in the holdings, it’s likely the fund’s strategy doesn’t suit you. The top holdings will likely be on the website, with the full holdings disclosed in its annual report.
Read the prospectus
This should have details about the fund’s strategy - what it will and won’t invest in. Look for precise language, engagement with specific companies and ESG being expressed as a core value, not just one factor among many.
Look at the fund manager
Some fund managers have many years of expertise in sustainable investing, with examples of them influencing companies through AGM voting. ShareAction issues reports ranking fund managers on their records.
Talk to a specialised financial adviser
Not all financial advisers specialise in sustainable investing, so look for one who is a member of the UK Sustainable Investment and Finance Association. They should ask you to complete a questionnaire on your interests.
source https://www.which.co.uk/news/article/new-labels-to-make-it-easier-to-pick-sustainable-investments-atLOq8B3jmO9