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Seven red flags in ESG investment funds

Red flag ESG investment funds

Sometimes companies make genuine strides to become planet-friendly. And there comes a point when they need money to make it happen. That’s when they turn to Environment Social Governance (ESG) fund managers. My favourite (probably everyone’s favourite) example was when the cheekily-named Dong Energy completely overhauled its coal-based structure to go renewable. Over the next decade, dirty Dong (woah there!) – now, understandably re-named “Ørsted” – greened-up so much that it became the World’s Most Sustainable company. This major success was the blend of serious ambition for change and ESG investment.

Then, in tier two, there’s the universe-sized grey area within green investing… The companies that take ESG money but raise eyebrows along the way. Pharma companies using animal testing, electric car giants disposing of toxic batteries or data centres emitting more carbon than aviation. You know… the iffy ones.

But the most unforgivable group – the one that really winds me up – is where companies pretend to be greener than they are. They snatch up our ESG investment but continue to harm the planet. The nerve! Those carbon-pumping, planet-polluting, humanity-devoid GREENWASHERS. Sadly, our ESG investment funds are riddled with them. Sneaking on the fund list for fake or irrelevant reasons has become normal.

So how can you sniff out ESG tricksters? How can you avoid paying into them? Here are seven greenwashing red flags to help you invest in genuine ESG funds:

1. Something feels weird

You know the feeling. You click on the fund, open the “holdings” and then you spot a company that just doesn’t feel right.

Trust yourself. And investigate further. 

95% [1] of our brain function is unconscious. That means, the information you’ve gathered over your lifetime is stored there, even if you can’t consciously remember it. If your brain is making all these connections and alarm bells start ringing, definitely go for a google. Our intuition is there to help us.

2. It’s a fashion brand

Major red flag. Especially when it comes to fast fashion. The word “fashion” literally means, “The popular or latest style at a particular time”. So, definitively, it cannot be sustainable, right? Because fashion does not last indefinitely and sustain itself forever. Far from it. The average fast fashion garment is thrown away after just eight wears. [2] Any fashion company on the stock market (we’re not taking privately-owned hemp manufacturers) claiming to be “sustainable” requires serious investigation. Because it’s probably bollocks.

The fashion industry is the second largest polluter in the world (after oil), accounting for 10% of carbon emissions. And the microplastics released when we wash clothes – especially “recycled” clothes – are deeply damaging to life on earth.

Some fashion brands sneak on ESG funds because of their so-called human rights initiatives. The “S” and “G” in ESG. H&M, Asos, Lululemon, Nike… there are many. But don’t believe a word of it before you research. Because garment workers are being killed and beaten down every day, fighting for fair wages. And 20,000 people die a year from the chemicals sprayed on cotton.

3. The company still uses plastic packaging

PepsiCo and Coca-Cola both feature heavily in ESG funds. Often, they can be found in the top ten holdings. But when they still splurge so much single-use plastic into the world, they support oil tycoons and pollute the planet at the same time. Like, how is that ESG?!

Check carefully to see if the brand plans to replace plastics with biodegradable alternatives. And if so, what are the targets and deadlines? Don’t take any wishy-washy or meek targets. We want hardcore commitments. Words like “strive”, or “aim to achieve” are not targets. They are little disclaimers used to avoid taking full responsibility. Red flag.

4. Everything rests on a new product

Sticking with fizzy drinks, PepsiCo framed their (plastic) packs of syrup for carbonated water as a kind of ESG-win. But clearly, a bag of syrup will not replace a bottle of cola when you’re out in the park or needing a mixer for a friend’s party.

So, while it may be less destructive to the planet than their usual range, they have still not solved their plastic pollution problem. This syrup product line is to make money. Fine. But don’t claim to be an ESG company, right? And leave the ESG investment money for a company that will truly make an impact.

We see this a lot. Another example is in energy. Companies such as BP, Shell, Exxonmobil and more are finding renewable ways to make electricity. And hoovering up ESG money to do so. But they are still expanding their oil operations as their main business. Drilling new sites and investing in oil-mapping technology. Diversifying or future-proofing its product range does not make a company ESG.

5. The CEO has a sketchy reputation

To get a glimpse of how ESG a company truly is, look at the philosophy of the people in charge. Tesla, for example. Are carbon emissions a priority for Elon Musk?

The eccentric billionaire partnered with sketchy mining company, Glencore. He has ambitions to open space tourism, a massive blow to carbon emissions. And his obsession with energy-intensive cryptocurrency leaves me feeling sceptical.

Likewise, Bill Gates’ Microsoft is a classic top ten holding in ESG funds. But Microsoft provide the technology for oil companies to find and drill new oil. The company warms up oceans with data centres, is famed for tax-dodging and corruption scandals. Not to mention that Bill Gates has four private jets, which he uses frequently.

Other people may feel differently. But if the CEO makes your stomach churn, that could be a red flag.

6. Fast food

Major red flag. Because… How? How can a fast food company possibly be good for the world? Rearing cattle, promoting cheap meat, deforestation, obesity epidemics, health complications, diabetes, plastic packaging, litter problems … I honestly don’t know where to begin or end. I couldn’t believe it when I first saw McDonalds in an ESG fund. Or junk food like Hershey’s chocolate for that matter.

If you see junk food or fast food in an ESG investment fund, find out as much as you can about why it’s there. Because it’s probably just some classic greenwashing.

7. Energy companies whose main product is still oil

Obviously, right?

But here is a scary twist. Sometimes when I research the marketing produced by energy companies, I find myself starting to buy into the bulls***. Yes. Really! It’s extremely compelling. BP is a classic. Everything from the flower logo design to the choice of words is designed to steer you in the direction of ESG.

But don’t fall for it! Companies like BP – well, let’s call it by the real name British Petroleum – have zillions to spend on greenwashing. For example, British Petroleum have spent $3.6 billion on green marketing, $50 million pressuring government against climate change legislation and it’s widely reported that their strategy is to bankrupt environmental activists like Greenpeace into silence. [3]

So, even though it’s a mind-f***, stick to the facts. Be wary of magic marketing!

So where should you invest?

Tricky question. There is no one-size-fits-all answer. You must find what you believe in. Personally, I’d tend to avoid MSCI indices because I don’t think that their ESG screening is up to much. I mean, they double-A rated fast fashion retailer Boohoo as ESG, literally two weeks before it’s modern slavery scandal broke. Like, honestly, who approved that?!

I’d start the search by looking at “Impact” funds. Then work down from there. I wouldn’t even bother with “ESG Screened”, because the only things they tend to screen out are alcohol, pornography, weapons and gambling. And I care a lot more about deforestation, oil, human rights, and plastic pollution.

Whatever you do, doing something is always better than doing nothing. Your money is powerful and the way you use it can (quite literally) make a world of difference.

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