How to choose ESG investment funds (and avoid greenwashing)

Environmental, social and governance (ESG) investing has gone mainstream. Even if you’re new to the world of investing, it’s likely you’re aware there are options to invest your money in sustainable assets.

As the responsible investing movement shows no sign of slowing down, it’s no surprise that companies are keen to shout about their sustainable credentials. But some are resorting to greenwashing — putting across an image of being more sustainable than they actually are.

And with no robust industry definition for what constitutes an ESG fund, consumers may be surprised to learn that the fund they thought aligned with their ethical standards is invested in things like fossil fuels - even though it is still categorised as a responsible fund.

“ESG is a broad statement”, explains Aviva Financial Advisor, Shanaka Cristofoli. “Choosing funds really comes down to an individual choice. If being ethical is important to you, it’s worth doing thorough research and making sure what you’re investing in aligns with your own standards.”

It’s a good idea to understand the different types of responsible funds available before you decide where to put your money. We asked Shanaka to explain the types of ESG funds you might choose and why – and how you can avoid greenwashing.

Remember, wherever you’re putting your money, the value of your investments can go down as well as up and you may get back less than you originally paid in.

Types of ESG funds

Here are some of the main types of ESG funds on the market, but they aren’t mutually exclusive — so several of these investment strategies could apply to a particular fund.

ESG integrated funds make environmental, social and governance considerations as an important factor in the wider research undertaken by a fund manager. “Their priority will always be financial return, but the thinking is that ESG standards are a key part of achieving that”, says Shanaka. The logic is that being a responsible investor can lead to better performance overall, because looking at how businesses treat employees, customers, and the world in which they operate minimises risk and reveals new opportunities.

“Exclusion funds completely remove investments in assets that don’t meet ethical standards”, explains Shanaka. “For example, you might want to avoid so-called ‘sin stocks’, like gambling or tobacco companies.” As the world wakes up to the impact of climate change, investments in companies that contribute to things like deforestation or unacceptable levels of pollution are being routinely excluded. “With exclusion funds, return on investment is still important, but the focus is striking a balance with your moral beliefs”, says Shanaka.

Sustainability focused funds invest in companies which are behaving sustainably, whether that’s by driving towards more sustainable business practices, or demonstrating strong green leadership. They’ll also invest in companies that the fund manager thinks will benefit from consumers wanting more sustainable goods and services.

Impact funds take sustainability-focused funds a step further – they focus on companies’ positive impact on the environment and society. Sometimes they even focus more on this positive impact than any financial return. “The focus is to use money and investment capital for good, so it’s often seen as a way of giving back to society while investing,” says Shanaka. Impact funds might invest in areas like renewable energy, electric cars, education or healthcare.

Avivia’s Stewardship Funds have been around a while: they were launched by Friends Provident and are now managed by Aviva Investors and were the first ethical funds of their kind when they first launched in the UK in 1984. “

The Stewardship ethos is that companies and their products and services can harm the world and its people and Stewardship aims to avoid investing in such companies and also works with businesses to create positive change.

The Stewardship Funds still focus on investment performance though so these funds are not strictly ethical.”, explains Shanaka. They won’t invest in companies that don’t meet certain ethical standards or are considered harmful to society. 

Tips for avoiding greenwashing

How can you ensure that the company you’re investing in is as responsible as it claims to be? Here’s Shanaka’s advice.

  • Go beyond the name of the fund. Terms like ‘sustainable’ and ’responsible’ may sound reassuring, but it doesn’t mean that the fund will meet your values or your aims
  • Take a look at the fund fact sheet and Key Investor Information Document (KIID) to find the stated aims and past performance
  • Check whether the company has an ESG policy – does it aligns with your own standards?
  • Look at annual reports and see if there is ongoing accountability when it comes to ESG targets
  • Speak to a financial advisor. It’s a paid for service, but they can give you a good idea of which funds meet your ethical and financial goals. Find out more about Aviva’s advisors here.

Aviva and ethical investing

Aviva was the world's first carbon neutral international insurer in 2006, in 2019 we achieved our 2020 target set in 2010, by reducing our carbon emissions by 66% and we're aiming to be a net zero carbon emissions company by 2040. We are committed to investing responsibly, with ESG considerations a central pillar of our investment process and integrated across all of our default pension funds. So far, we’ve invested £15bn in responsible infrastructure projects like hospitals, public transport, and green energy.

Learn more about our ethical investing strategy

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