Recycle Week – which is occurring between 14 and 20 October 2024 – is an annual event that encourages people to recycle more and cut down on unnecessary waste. It serves as a timely reminder of the growing emphasis surrounding sustainability and ethical responsibilities.
Beyond recycling and reducing waste at home, another increasingly popular way for individuals to address their own impact on the world is through Environmental, Social, and Governance (ESG) investing.
This framework allows you to align your wealth with your values and feel as though you’re meaningfully contributing to a more sustainable future according to three pillars:
- Environmental – Identifies how a company’s operations affect the environment and the measures it takes to reduce this impact, including managing waste or using renewable energy.
- Social – Focuses on a company’s relationship with its employees and the communities it operates in. This could include how it treats its staff and the working conditions it provides.
- Governance – Refers to how ethically and transparently a company is run, including its corporate structure, accounting practices, or tax strategy.
The popularity of ethical investing has been rising recently, with Bloomberg revealing that global ESG assets are projected to surpass $40 trillion by 2030.
Moreover, a study conducted by Finder further shows that 1 in 10 UK investors have already engaged in ESG investing in some capacity, while a previous survey found that 77% of respondents would consider investing ethically in the future.
However, as ESG investing gains traction, it’s vital to be aware of certain risks, one of the most significant of these being “greenwashing”.
ESG investments have faced problems with “greenwashing” in the past
Greenwashing essentially refers to the practice of companies or funds presenting themselves as more environmentally or socially responsible than they really are through false advertising or misleading information.
This is designed to attract consumers and investors who are increasingly prioritising sustainability, and unfortunately, greenwashing is far more widespread than you may think.
According to data from Kantar, 52% of global survey respondents reported seeing or hearing false or misleading information about the sustainable actions taken by brands.
A notorious real-world example of greenwashing is the case of Volkswagen in 2015. At the time, the company had been marketing its vehicles as low-emission and eco-friendly.
However, it was revealed that the company had been fitting its vehicles with “defeat devices”. These were designed to manipulate emissions tests, making their cars seem more environmentally friendly than they actually were.
The reality was that Volkswagen’s engines were emitting nitrogen pollutants at levels up to 40 times above the legal limits in the US, the BBC reports.
Greenwashing extends beyond individual companies, too, and even your pension might not be safe from false claims.
Indeed, a 2023 report from the Guardian revealed that over 160 supposedly “sustainable” pension investment funds held $4.6 billion in companies such as Chevron and ExxonMobil, which are known for their significant carbon emissions.
The main risk posed by greenwashing is that it can mislead you into investing in companies or funds that contradict your values and beliefs. You may also believe your investments are contributing to a more sustainable world when, in reality, they are funding activities that conflict with your stance.
The Financial Conduct Authority introduced new guidelines that aim to tackle “greenwashing”
Thankfully, efforts are being made to tackle greenwashing. The Financial Conduct Authority (FCA) recently introduced new rules and guidelines aimed at dealing with the issue and ensuring greater transparency in ESG investing.
These new rules are designed to help you make more informed decisions, offering clearer information, and reducing the likelihood of being misled by exaggerated green claims.
Three of the main measures introduced include:
Anti-greenwashing rules
These rules – which came into force on 31 May 2024 – apply to all regulated firms and aim to ensure that sustainability-related claims are fair, transparent, and not misleading.
This means that you can have more confidence in the accuracy of any information provided to you regarding the environmental and sustainable credentials of investment products and services.
New labels
To further increase transparency, the FCA also introduced four new sustainability labels – which you can see below – to help you identify truly “green” companies.
Source: Financial Conduct Authority
These labels came into effect on 31 July 2024, and the FCA reveals they mean that any authorised firm:
- Sustainability Focus – Invests predominantly in assets that focus on sustainability, such as activities that support clean energy production.
- Sustainability Improvers – Invests mainly in assets that, while not sustainable now, aim to improve their credentials, such as companies seeking to achieve net zero or improve social standards in the business.
- Sustainability Impact – Mostly invests in solutions to sustainability problems, aiming to achieve a positive impact for people or the planet, including renewable energy generation or social housing.
- Sustainability Mixed Goals – Invests in companies that might include a mixture of activities outlined by the other labels.
You may start to notice financial providers using these labels to designate their sustainable investment options, making it clearer that what you’re investing in is actually ethical.
Naming and marketing rules
To prevent misleading product names or advertising, the FCA has also introduced stricter regulations on how investment products can be marketed.
This ensures that you know exactly which sustainability criteria you can expect your chosen product to meet so you know exactly what you’re investing in. Just note that these rules won’t come into effect until 2 December 2024.
We can help you create a sustainable investment portfolio that works for you
While the FCA’s new guidelines are certainly a positive step forward in tackling greenwashing, it’s still vital to do your own due diligence and ensure that your investments align with your goals and attitude to risk.
This is where seeking professional advice is useful. We can help you build a portfolio that aligns with your principles while taking into account your appetite for risk and any long-term financial objectives you hold.
At the same time, we can help you navigate the complexities of ESG investing, ensuring that any companies and funds you invest in are as sustainable as they claim.
Get in touch
We could help you invest according to your personal ethics, all while remaining in line with your goals for the future.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.