How to ensure the sustainability of investments
Sustainable funds, green portfolios and responsible investments- what does it mean exactly? And how can one ensure the actual greenness, the sustainability or the responsibility of funds?
As the number of green funds increases, investment greenwashing is a growing concern. Greenwashing is misleading claims of products, services or performance featured as more "green" or environmental-friendly than they actually are. Greenwashing can often be seen in misleading commercials, product advertising and communication. It can simply be the usage of green color or nature pictures in product advertising, brand logos or at company websites whose actual purpose does not have anything to do with the environment.
Environmental, social and governance (ESG)- investments are mainstreaming investor practise and the number of initiatives and frameworks for responsible investments are growing. However there is not yet any standardized classification for green funds or sustainable finance but there are common strategies for assessing the greenness, sustainability and responsibility of funds.
When a fund is presented as green it is often due to the particular way of investors’ ESG-integration in the fund composition. Some Investors focus on an inclusionary approach in which the most positive environmental-performing companies are selected in funds. Other investors use oppositional approach, an exclusionary investment approach, in which the most negative environmental performing companies are excluded from the funds. Impact investing is another common investment approach where investors focus on influencing companies’ ESG performance by using their shareholder power and practice active ownership.
Inclusion and exclusion of portfolio companies are beneficial investment approaches due to its direct action in terms of share price- and signaling effect. Once a portfolio company is included or excluded from fund investment it sends signals to the rest of the financial market as influencing the speculations.
Impact investing is not as directly influential as exclusion or inclusion investing, but is more efficient for long-term impact due to its active approach of engaging companies toward a more sustainable transition. Impact investing however sometimes leads to exclusionary action of portfolio companies.
Although investors incorporate responsible investment initiatives , how come that funds can be greenwashed?
Well, greenwashing of funds can be found in cases of exclusionary investment approaches in which obvious candidates are excluded from the portfolio, which only contributes with a very small gesture towards sustainability and mostly benefits investors' posturing. Or in cases in which inclusionary investment approaches misrepresents the actual ESG-integrated proportion of asset managed in funds. Investors may only target ESG-integration on a very small proportion of the total assets in a fund, leaving out the rest of the assets for non- sustainable investments. Typical for investment greenwashing is that investors use ESG-integration approaches for positionering and not considering their clients or the actual environmental performance of portfolio companies, washing the actual impact. Most typical is that investors are not completely transparent about their investment action.
Converting funds toward green is not an immediate action, it is a process requiring effort, time and transparency. Active ownership is thus a very rewarding approach for responsible investments, due to its long-term perspective and its high levels of transparency. Through actively owned assets, investors take responsibility for a sustainable green transition, engaging and encouraging issuers to progressively turn green.
As a private investor you can use your right, ensuring your capital and savings are managed by investors in an alignment that fulfills your purpose. How ESG-issues are integrated in funds are stated in asset managers’ investments policies or annual reports. It can be helpful to look for investor’s practical examples of exclusions, inclusions or active ownership strategies- and if there aren’t anything made public, ask your asset manager personally.