Mike Appleby

How to dodge the greenwash – is your fund sustainable?

Mike Appleby

With so many so-called sustainable funds coming to the market, it is increasingly important to identify ‘greenwashing’ in practice, where groups are talking up their credentials in this space without the expertise or track record to back it up.

While sustainable investing might come in many guises – and many initialisms – its move from the fringes to the mainstream of the financial world in recent years is undeniable. As ever, with popularity comes proliferation and as more and more groups enter the market, we have come up with five ways to tell whether funds, and the teams behind them, can meet investors’ sustainable expectations:

  1. Transparency. A genuinely sustainable fund manager should be transparent about how they invest, as well as being open to be challenged. This should include clear and simple information explaining how the team runs money: what companies they look for under the sustainable approach and what they avoid. It should not be generic greenwash, with little more than meaningless ‘brochure’ comments like “sustainability is in our DNA”.

    At the most basic level, a sustainable manager should be able to provide a full list of all the companies in which a particular fund invests rather than just the standard top 10 that appears on factsheets. If they are unable or unwilling to do this, this is a red flag. 

    Ultimately, investors should expect to see frequent communication giving an update on what is going on in the fund, relating back to the investment decisions and companies held. Anyone can write a generic report on climate change but how is the portfolio positioned in light of the huge challenges that combatting this will entail? The manager should respond to queries about companies they are invested in and explain why they like them. If you cannot contact them or don’t get a meaningful answer, this should be cause for concern.

     
  2. Experience and resource. As in any walk of life, we believe the experience and depth of a team is important when it comes to sustainable investing. There is nothing to say a new fund will not be a good investment and there are interesting products coming to market but to use a simple analogy, if you need a plumber, you are likely to choose one with experience over a novice. For our part, our team at Liontrust have has been investing sustainably for 18 years and we currently have a team of 14.

     
  3. Knowledge and ongoing training. Sustainable investing is a specialist area and subjects like climate change are fast moving so investors need to be confident their chosen managers have the required knowledge to run money in this way. This can be anything from members of the team having specialist qualifications to a general focus on training to ensure people understand the latest sustainability trends. Again, if managers cannot display this, that represents a red flag.


  4. Activism. Engagement is a key part of what we call sustainable investing and we feel managers should be able to highlight a track record of holding companies to account and encouraging them to improve. Managers should be able to talk in detail about their engagement priorities – whether diversity, tax transparency or plastic pollution – rather than just making sweeping statements. It is also worth looking at managers’ AGM voting records: do they just vote with company management or actually challenge the businesses in which they invest to improve?

     
  5. Evidence. Ultimately you are looking for all this knowledge and experience in sustainability being applied to investment decisions – giving meaningfully different exposure compared to more conventional funds. Are managers able to show how their sustainability views are reflected in their decisions: is it simply ESG data and reporting for the sake of it or actually making a difference to investment? Again, transparency is important here: can managers provide concrete examples where, if you removed the sustainability aspects from a business, they would not have invested in it? 

For a comprehensive list of common financial words and terms, see our glossary here. 



Key Risks


Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, October 24, 2019, 1:15 PM