Are you a sustainable hardcore or a sustainable ummm?

This week we published a research report for the industry on what retail investors (you guys) make of sustainable funds.

Roughly 1 in 4 of all investors owns at least one sustainable fund, but it’s an area full of confusion, suspicion and scepticism. Interest peaked during lockdown, as we had collective existential crises about the future of the world, and as the oil price plummeted because you don’t need oil when you’re not going anywhere or making anything, so sustainable funds (which will typically avoid oil) did pretty well.

Then, as every shampoo, trainer and coffee maker started shouting about how sustainable they all were, marketed by orange influencers with large lips who hang out in air-conditioned hotels in Dubai, we got collectively more fed up about greenwashing. Lots of us would look at a fund factsheet of something with ‘sustainable’ in its name, see an oil company in its top 10 holdings, snort and choose something else. Then Putin started the war in Ukraine, and so filthy fuel became more scarce, hence more pricey and so sustainable funds got relatively whacked. Hit by the double whammy of scepticism and underperformance.

In response to over-enthusiastic claims as some financial firms tried to pass themselves off as environmental activists, the regulator will be introducing new anti-greenwashing rules from the end of this month. They will also be introducing 4 sustainable labels from the end of July, with specific rules about how firms can use these. In order to use a label, a firm will need to show that the fund has the aim of ‘improving or pursuing positive environmental and/or social outcomes.’

And from December there will be new rules about marketing which basically say that you cannot even use words like ‘sustainable, sustainability, impact’ for products which do NOT have a label.

Here are the 4 new labels which you will start to see from the summer. What do you think?

When we explained these to investors, and asked which one they thought most closely aligned to what they wanted, 1 in 5 still said, “don’t know.” So these labels alone won’t bring conclusive clarity. But I think they're a good step forward and will help. I’ve had a go at translating the labels into Holly-speak to explain what they mean. Here goes.

Sustainability Impact = Hardcore. “Fight The Power.”

The aim is to achieve a positive and measurable impact in relation to an environmental or social outcome. This fund is for someone who can see climate change, who has changed their habits and buying behaviours, would never buy clothes from Shein and has a poster of Greta Thunberg on the wall.

Sustainability Focus = Pretty Good. “I really genuinely want to be better”.

At least 70% of the investments must be in environmentally or socially sustainable things, you can’t have anything dodgy and fund managers have got to be able to evidence the sustainable nature of their investments in a way that wouldn’t make them feel ashamed if scrutinized by their Mum’s bridge group. This fund is for people who religiously recycle and consider their travel carefully but still go on the occasional long-haul flight.

Sustainability Improvers = Getting There. “Rome wasn’t built in a day.”

This is all about transition. The investments should have the potential to improve environmental and/or social sustainability over time. This must be measured and tracked. An investment manager should use their clout at shareholder meetings to hold the companies to account. This is the sort of fund where you might see some oil companies with transition plans, for example. This fund is for pragmatic people who are likely to see both sides of any argument and don’t like to be too radical.

Sustainability Mixed Goals = Ummm. “I can’t decide what to have.”

This label recognises some funds will blend the above three approaches and so it’s a mixed bag. At least 70% has to be invested in accordance with rules for the above three. It’s a mix of hardcore, pretty good and getting there. This fund is for those people who swing between the burger or the fish and chips for about 3 minutes at the local pub as the young waitress smiles painfully through gritted teeth, and people like me silently scream COME ON in our heads as we incredulously observe the faffing. Oh maybe that’s a touch harsh…? 😀

Our research found that although lots of investors still remain confused, the most popular label with you is the Mixed Goals. Followed by Impact. If I look at all the sustainable funds out there today, realistically we’re likely to see more fall into the Focus camp that any other, but time will tell. I should also say that although some fund managers have been fast and loose with descriptions and claims, there are also many out there who I think genuinely do a good job. Independent research firms like Morningstar are helpful today when trying to sort out the organic wheat from the chaff.

Finally if you’re not fussed about sustainable funds, but are interested to see what everyone else is buying, you can check out our best-selling funds report which aggregates the most popular picks on major UK investment platforms in April.

Have a great weekend everyone. I am digging out my very attractive neoprene swimming gloves and the wetsuit which gives me panic attacks when I try to get out of it, and heading for my first swim in the sea of the year. If I don’t send the blog next week, will someone send out the search party for something that will look like a large frozen seal with gloves on in the Solent?

Holly

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