Many investments claim to be good for people and the planet – but to what extent is this a marketing move? Three strategies can help investors squeeze out the greenwash.
Australians are increasingly looking to invest in environmentally friendly, sustainable and ethical investments.
The catch is that our passion for matching portfolios with personal values has spurred environmental growth – the practice of investing sounds more environmentally friendly than it actually is.
Simon O’Connor, CEO of the Responsible Investment Association of Australia (RIAA), says the “green” problem is growing, especially as more investment funds respond to growing investor demand.
He notes: “Most investment managers do not wake up in the morning looking to deliberately mislead consumers or investors. We need to close the gap between what is written on the package and what investors expect to see in the portfolio.”
No clear recommendations
Although companies, including investment managers, may face heavy fines for false or misleading product claims, Australia does not currently have mandatory reporting standards to help consumers better understand and compare “green” products. .
As O’Connor notes, “this is an evolving space. There are reporting standards that over time improve the consistency of how we label products, which complicates environmental friendliness.”
At the same time, investors can find the devil in the details. O’Connor says some funds will allow small amounts of fossil fuels, which means they may include companies that earn only 5% or 10% of their fossil fuel revenue.
“Most products will be ahead of this,” he notes. “It’s only if they claim to be ‘fossil-free’ or use some other broad statement, but still have that impact.”
An additional challenge is that each investor has their own views on what is important for sustainable investment. O’Connor notes that some may find it important to avoid sectors such as alcohol, which will not be a problem for others.
Once you determine what you want to see in green investing, three strategies can help you sort out the facts.
1. Look past the title
Do not base your investment decision solely on the name of the fund. Dig deeper to find out what the fund claims – and how those requirements are met.
This is an area where consumers need to be mindful of fine print.
According to O’Connor, the fund, which claims to be “low-carbon compared to the standard”, does not necessarily exclude the extraction of thermal coal from its portfolio. This simply means that the fund’s portfolio will have a smaller carbon footprint than the benchmark it tracks.
2. Immerse yourself in major companies
You should also look closely at the companies in which the fund invests.
“This is needed to make sure the product meets specific issues that you personally consider important,” O’Connor says.
This type of deep dive can bring surprises.
If you want to invest in a fund that is labeled as a “clean energy fund,” you expect to see companies that deal with renewable energy. You can also expect not to see big polluters, ”O’Connor explains. “However, keep in mind that there are different approaches to managing issues such as fossil fuels in investment portfolios, and not always the most effective way may be to sell.”
In fact, there are reasonable arguments for funds to have a stake in companies that produce fossil fuels or other environmentally harmful products, as the fund manager can use his influence to push for positive change.
3. Check for reliable certification
An easy way to avoid environmentally friendly funds is to look for third-party certificates, such as the RIAA’s Responsible Investment Certification Program.
O’Connor says: “The RIAA is doing a hard job of helping consumers and investors understand how products are made and managed in terms of environmental and social sustainability. We throw tires to make sure they say what they do.”
The RIAA also has a handy Responsible return An online tool that can help consumers make responsible choices. It contains over 200 banking, super and investment products, all of which are RIAA certified.
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