This article was last updated on 05/12/2024
While Socially Responsible Investing (SRI) is evolving, it’s still a relatively new concept which can be met with criticism. For consumers, it can be a complex topic to understand - especially given the threat of greenwashing. Greenwashing is the act of making misleading or false claims about environmental credentials or sustainability. Thankfully, the Financial Conduct Authority (FCA) has stepped in to help. On 31 May 2024, it introduced new anti-greenwashing rules to help savers and investors alike. These new guidelines represent a significant step towards transparency in sustainability claims. But if you still need a little help understanding, this blog is for you.
Keep reading to find out about the main myths and misconceptions around SRI.
MYTH 1 - socially responsible investments underperform traditional ones
False. One of the common debates surrounding SRI is whether these funds can deliver the same returns as traditional investments. Research by Robeco found sustainability data can positively influence returns in 38% of cases. The same research found Environmental Social and Governance (ESG) investing didn’t cause superior or drastically lower returns when compared to traditional investments.
MYTH 2 - socially responsible investing means investing in fewer companies and taking on more risk
False. It’s a misconception that by engaging in SRI, you’ll have few companies or pension funds to invest in. In 2022, there were over 186 sustainable exchange-traded funds (ETFs) representing $100 billion in value. These are investments (shares, bonds or commodities) that are traded on a wide range of stock markets. This represents approximately $100 billion in value.
Global investment research platform, Morningstar provides sustainability ratings on over 20,000 funds. So investors now have a universe of funds to choose from and compare alongside each other.
New FCA regulations mean more companies need to disclose the impact of their supply chains. This means there will be even more data on performance to help inform your investment decisions.
Research from FTSE Russell - a financial company who produce and maintain stock market indices - suggests 64% of all asset owners (i.e. pension fund managers) are keen to adopt sustainable investing. This means companies who don’t adequately manage issues like climate, water and human rights in supply chains may well experience a negative impact on their value. Plus they’re vulnerable to reputational damage.
PensionBee’s Shariah Plan and Climate Plan are both examples of SRI.
MYTH 3 - sustainable investments are only focused on solving environmental challenges
False. While environmental challenges are topical, there are many iterations of ‘sustainable’ investing. The Chartered Financial Analyst Institute (CFA) breaks down the main differences.
Socially responsible investing – an investment approach that aims to achieve financial returns while investing only in companies that contribute towards positive social outcomes.
Sustainable investing – a broad term which can refer to the selection of assets that contribute to a sustainable economy in some way. Sustainable investing prioritises funding companies that consider their long-term impact on people and the environment.
Impact investing – investing with the intent of generating positive and measurable social and/or environmental impact alongside a financial return. There are also investment themes that focus on sustainable cities or renewable energy. Some of these strategies may be purely focused on climate-related issues and others on people. Screening strategies can also consider ethics, religion, alcohol, tobacco, fossil fuels and more. Take a look at the As You Sow Invest Your Values platform to discover funds with different exclusion criteria.
MYTH 4 - socially responsible investing is just a trend
False. Some sceptics believe that the focus on SRI is simply a trend. This has been driven by the conflict surrounding ESG due to its risks of greenwashing. However, investing with consideration to the climate, plastics, biodiversity, poverty and equality will only become more important. Particularly in regions that are most vulnerable to climate change.
Global asset managers are already starting to adapt to this change. In 2021, 84% were implementing or evaluating sustainable investment strategies - an increase from just 53% in 2018. The scale of increase over the last decade is also worth noting. Morgan Stanley Capital International (MSCI) reported that ESG assets under management increased from $6 billion in 2015 to $140 billion in 2020.
MYTH 5 - ESG scores are always trustworthy and a good measure of a company’s sustainability credentials
False. However there’s potential for this changing as part of the new FCA rules mentioned. Rating providers such as Moody’s and MSCI evaluate a company’s performance across ESG criteria. These scores are used to help investors make decisions about sustainable investing. However, these organisations don’t all use the same methodology. Some use publicly available information while others engage directly with companies. So it can be tricky to compare ESG scores. For example, in 2020, fast fashion retailer Boohoo was given a ‘double A’ rating - the second highest possible ESG score. This score was despite the company’s poor supply chain practices, which included paying workers in its Leicester factory £3.50 per hour. Similarly, in June 2023, cigarette manufacturer Philip Morris International had a higher ESG rating than Tesla. Although, it’s worth noting that the market is constantly evolving, with new metrics emerging. In fact, the choice of socially responsible funds looks set to keep growing according to FTSE Russell.
Summary
In today’s world, SRI will continue to become more relevant. Morgan Stanley reported that 77% of global investors are interested in sustainable investing. A further 54% are planning to increase their sustainable investments over the next year. So it’s well worth keeping up to date on the latest developments if you’re trying to make more informed and ethical investment choices.
Interested in learning more? In episode 16 of The Pension Confident Podcast, we explore impact investing. Listen to the episode, read the full transcript or watch the highlights on YouTube.
Amy Nguyen is a Strategist, Researcher and Writer focusing on corporate sustainability, global value chains, finance and fashion. Amy is the Founder of Sustainable & Social, a platform dedicated to deconstructing complex climate issues for a millennial audience.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
