Our thinking

ESG drama

11 October, 2024

In the latest series of Industry, an asset manager looks at a list of ESG investments in dismay. “There’s a green fintech company. Do we know what that is?” he asks, bemused. The plot centres on mis-selling of ESG stocks and the consequences, from overinflated assets to the hypocrisy of taking a private jet to COP to market your green energy IPO. If you’re an ESG cynic, or just want good TV drama with some outrageous behaviour, it’s worth watching.

ESG is under pressure in the real world too. US states are pushing back against ESG considerations in state pension funds, funds have underperformed because of increases in share prices of traditional energy companies, and investors are concerned about funds making unsubstantiated sustainability claims. It’s this that regulatory changes around “greenwashing” address. Most recently, the FCA in the UK has introduced the Sustainability Disclosure Requirements (UK SDR) which “provide greater transparency, consistency and in turn, trust, in the market for sustainable investment products”. The regulations introduce four distinct investment labels for funds, including “sustainability impact” (the fund has a significant positive impact on sustainability), to remove the ambiguity and inconsistency that was prevalent in the sector.

It’s caused turmoil. Last month, the FCA offered funds waiting for approval to use one of the new SDR labels some flexibility to use terms like “impact” and “sustainable”. However, with only a handful of funds having so far received approval to use the “sustainability impact” label, some  that previously offered ESG-branded funds have dropped the use of such terms altogether.

If you’re wondering where your “sustainable growth fund” option in your ISA has gone, it’s probably been renamed. Misleading marketing of funds purporting to be sustainable is (or was) a real problem, creating confusion, and allowing less scrupulous Industry-types to make a quick buck, giving ammunition to those with an ideological opposition to the whole concept of ESG. However, we shouldn’t set the bar so high that sustainable investing becomes a niche activity – we need investment in green energy (and maybe even green fintech), the circular economy and other sectors to support the transition, and that means offering investors of all sizes a range of reliable and transparent opportunities.

By Claire Jost