ESG investing – 4 common myths that you may have heard, busted

In November, the UN climate change conference takes place in Egypt’s Sharm El-Sheikh, and could be particularly interesting this year. According to the Financial Times, soaring energy prices and shortage of supplies could overshadow the annual summit, which sees world leaders gather to discuss the climate crisis.

While surging energy prices is likely to be affecting you, a survey by YouGov suggests that you probably still feel it’s important to deal with the environmental challenges now facing the world. The study, carried out in 2021, revealed that 72% of Britons think climate change is a result of human activity, up from 49% in 2013.

One way you could help the planet is to consider placing your money into “sustainable” investments, better known today as Environmental, Social and Governance (ESG) funds. While they have become increasingly popular in recent years, you may not have invested in them thanks to myths that exist around them.

If you’re wondering: “should I invest in ESG funds?”, discover four common misconceptions and why they may not stand up to scrutiny. Before you do, let’s consider ESG funds in more detail.

ESG funds aim to reduce businesses’ impact on the planet

Environmental, Social and Governance (ESG) funds refer to the main three criteria that are used to determine a business’s impact on the planet and society. The following is a summary of each:

  • Environmental – this looks at how the company’s operations affect the environment, which could include energy use and whether it manages waste responsibly.
  • Social – this considers how the company treats its workers and whether it works with its supply chain to ensure the ethical treatment of suppliers and their staff.
  • Governance – this criteria looks at how a business is run. This might include the transparency of its accounting methods, its tax strategy and whether shareholders are allowed to vote on key issues.

By providing evidence of a company’s impact in these areas, it’s possible for investors to select companies they feel are more responsible. As such, ESG funds can help reduce the impact businesses’ activities could have on the environment.

While this may sound like a good idea, scepticism around ESG still remains. One reason for this might be because of several popular myths which may not be as robust as you think. We’ll look at some of them next. 

1. ESG funds are “greenwashed”

According to MoneyAge, one in four consumers who would not invest in ESG funds said it was because of fears of “greenwashing”. This is where the companies held within ESG funds have made unsubstantiated or misleading claims about their sustainable credentials. 

While this can happen, it would be wrong to suggest that all ESG funds are greenwashed. There are authentic funds as well, and a financial planner who is experienced in ethical investments will be able to locate them for you.

A word of warning though. As some advisers do not have extensive experience in dealing with ESG funds, they may not spot when they’ve been greenwashed. Thanks to my background in dealing with ESG funds, I can help ensure your money goes into bona fide funds.

2. Growth potential is reduced

According to a report by Morningstar from February 2022, in the five years up to the end of 2021, ESG funds had performed on a par with or better than conventional funds. Furthermore, the European Securities and Markets Authority (ESMA) revealed that in the 10-year period ending in 2020, ESG funds outperformed conventional investments and were also overall cheaper.

As you can see, assuming that ESG funds will always reduce your money’s growth potential may not be correct. Please remember, past performance is no guarantee of future performance, and ESG funds can go down as well as up. 

3. ESG funds won’t make a difference

An article by PensionsAge shows that investing in ESG funds could be an extremely effective way of helping the planet. It refers to analysis from Make My Money Matter (MMMM), Aviva and Route2 in 2021, which revealed that ESG funds could be 40 times more powerful in tackling climate change than switching to a renewable energy provider.

Furthermore, it could be 20 times more effective than driving an electric car and 21 times more powerful than stopping flying.

4. It’s a fad that will pass

As the YouGov survey highlighted at the beginning of this blog shows, there is a growing awareness of humanity’s impact on the planet. With increasingly severe weather here in the UK – such as 2022’s heatwave that led to the highest temperature ever recorded and wildfires across the nation – concerns about climate change are unlikely to go away anytime soon.

As a result, interest in ESG funds may not end any time soon either. This dovetails into a report from the Nasdaq, which reveals research suggests demand remains strong for ESG funds in 2022. 

Furthermore, it added that 80% of investors could be planning to increase exposure to them during the next two years.

Get in touch

If you are wondering: “could ESG funds be for me?”, please email me on a.douglass@grosvenorconsultancy.co.uk or telephone 01793 766 123, and I’ll be happy to help. Alternatively, call my mobile on 07525 177 046. 

Please note that while I offer high standards of service and ensure any solution I recommend is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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