The clamour for all things sustainable has seen a sharp rise in the number of funds that claim to be green, when in all likelihood they aren’t. James Faulkner, our Co-Founder and Head of Distribution, explains how you and your clients can avoid being greenwashed.
” I can say that I am committed to living a healthy lifestyle. But if I continue to eat high-fat, high-sugar foods and do no discernible exercise then those words mean nothing.
It is no different with sustainability. Anyone at all can say they are committed to improving the well-being of the planet and all the creatures that live on it. It’s a noble commitment and essential. But if there’s no action, no sustained change in behaviours, then the words mean nothing.
There is a framework in business for how we consider sustainability – ESG. Investopedia defines ESG as: “Environmental criteria considers how a company performs as a steward of nature. Social criteria examines how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.” It’s all very clear and entirely appropriate.
I read a LinkedIn post recently from a fund manager claiming that all of its products had an “ESG focus”. What was difficult to see however, was any actual difference to how they deploy capital or manage investments. Therefore, we need to ask ourselves, what is the rationale and does the manager really believe in it? Or is this just saying what investors want to hear? There certainly appeared to be no evidence of any ongoing measurement of the fund manager’s or investee companies’ commitment to change.
If any fund manager claims ESG credentials purely to attract investment but cannot evidence how it makes a difference then it is ‘greenwashing’. Greenwashing is egregious and more than that, harmful. It potentially diverts capital away from where investors really want to put it and where it can potentially have the greatest impact.
And don’t be swayed by glossy brochures and web pages talking of UNSDGs and signing up to charters or initiatives that aim to do good. This could be just window dressing. Cut to the chase, ask them where the evidence for their commitment is and how they will report it to investors. I’ve no doubt that Boohoo had lots of ESG policy documents too.
At Vala all of our capital is contingent on investee companies committing themselves to becoming more sustainable. We require them to sign up to a framework that measures where they are against a large range of ESG criteria at the point of investment and then measures their progress. This means that we put sustainability at the heart of not only our investment decision making process but that it’s core to our post investment portfolio management as well – and we incentivise our portfolio companies to do the same. We will share these reports with investors enabling them to see precisely where their portfolio companies are on their sustainability journey and the impact that their investment capital has made.
So if in doubt about a fund manager’s green credentials or its ESG claims then ask them two questions: how do you measure the portfolio companies’ commitment to ESG? And, how do you report the fund and portfolio companies’ ESG progress?
If it can’t do either then its claims are more than likely simply rhetoric – so don’t fall for it.”
James Faulkner, Co-Founder and Head of Distribution.