Following an analysis of almost 100 mutual funds and ETFs by the University of California that highlighted the difficulties of telling the difference between a true ESG fund versus a greenwashed one, Morningstar ESG analyst Erica Hall said advisers must be on alert.
The research found that just 60 out of 94 funds positioning themselves as ESG-adjacent scored poorly when it came to their actual investments in fossil fuels, deforestation, gender equality, civilian and military firearms, prison industrial complex and the tobacco industries. As You Sow chief executive Andrew Behar said that ESG investing in funds and ETFs is the Wild West right now, due to the absence of widely accepted terminology, and little enforcement of those who try to pull the wool over the eyes of investors.
“We see funds with ESG in their names getting Fs on our screening tools because they hold dozens of fossil fuel extraction companies and coal-fired utilities,” he said.
On the back of this research, Ms Hall told ifa that advisers should work with clients on the matter, especially given that ASIC has flagged greenwashing as a potential issue and could result in regulatory implications.
“While this is a challenge for advisers, there are a number of ways they can work with their clients to spot and avoid products that are greenwashed,” Ms Hall said.
“Advisers need to look beyond a fund’s name or label and understand what its objective is: Does it aim to invest in companies with lower ESG risk? Does it aim to invest in companies that offer solutions to the world’s biggest challenges? Does the fund claim to have some sort of impact?”
Ms Hall said it is also important to look “under the hood” of the fund’s holdings and its ESG characteristic as many with a climate theme don’t just invest in green companies, but also “so-called transition” companies.
“These companies don’t necessarily have good green credentials today but plan to improve their environmental profiles,” she said.
