Ten ways to be sure your 'green' fund really does help save the planet

Green investing is more popular than ever with inflows into ethical, sustainable or responsible-badged investment funds running at record levels.

But how do you know that the fund you are buying – for an Isa or a pension – is really green and in line with your ethics?

Not easily, according to Mary Stevens, innovation manager at environmental pressure group Friends of the Earth.

She says: ‘Our view is that it’s really hard to tell if an investment vehicle is truly green. There’s a real lack of transparency.

‘Any investment company can call its fund ethical or sustainable. There ought to be more pressure on companies to conform to clearer standards of what these terms and labels mean.’ 

Here are the ten questions you should get answers to before opting for a specific green fund.

1. What kind of fund do I want to buy?

There are two main ways forward. One is to invest for ‘impact’ where you invest in a fund that holds companies making a positive difference to the environment.

The other route is to invest simply to ‘do no harm’ – so a fund’s underlying investments will include companies that have simply reduced their carbon footprint or gone carbon zero.

2. What’s the process?

In the online world it’s far too easy to make an investment fund look green with nice pictures of wind turbines and the colour green used across the website.

But never just go with the fund name or label. Check the process the fund uses to decide which companies to include and which to exclude and why.

Ultimately, the words ‘green’, ‘sustainable’ and ‘environmentally friendly’ are subjective. Fund managers will use different principles based on their views of what these terms denote, and you may not agree with them. 

Figures from green specialist Triodos Investment Management show that of the top ten companies included in several well-known sustainability indices, only one meets its ‘strict minimum standards’ for inclusion as a green-friendly business.

3. How long has an investment company been running green investments?

Lisa Stanley, of ethical money website Goodwithmoney, says: ‘Are they truly experienced or are they just hitching a ride on the bandwagon?’

4. What level of ESG (environmental, social, governance) knowledge do the investment managers have?

If a firm employs a large team of ESG fund managers and analysts, this should show a healthy level of commitment towards sustainable investing.

5. Are there ‘brown’ companies changing their ways in the fund you are looking to invest in?

One way to view investing in the future of the planet is to support funds that include extraction industries that are cleaning up their act.

Kit Winder, of investment expert Southbank Investment Research, says: ‘You could go for old oil and gas companies that are best in their class – for example, Shell and BP which are both investing in renewable assets. There is an argument to say that such improvements should be supported.’

This goes back to question one – namely that everyone has a different view of what constitutes a green fund or company.

6. What companies make up the index that the green fund I want to buy will track?

Index-tracking funds are a cheap and easy way to gain exposure to the stock market and there are a number of ‘green’ indexes that funds track. But the greenness of indexes varies. 

Tom McGillycuddy, co-founder of impact investing app Circa5000, says: ‘Look at the companies that comprise the green index the fund is tracking and this will give you an idea of whether it’s the investment for you.

‘For example, I look for those offering genuine climate change solutions.

‘So, if you see Spain’s utility company Iberdrola and Danish Vestas Wind Systems in the top five holdings, then you know you’re in safe green hands.’

7. How green is the exchange traded fund?

Green ETFs can be an easy and cheap way to invest in sustainable companies, but they can easily sweep in businesses that do not align with your ethical views. So it’s important to see what’s in their portfolio.

Southbank Investment Research’s Winder recommends Rize exchange traded funds.

He says: ‘They do a lot of research into how their green ETFs are constructed. It’s not just, ‘Let’s take a sector and invest in every single stock.”

8. What are the management fees?

Some green funds, and particularly ethical pension funds, have high management fees as they are considered ‘niche’. This can eat into your profits and should be avoided if possible.

Clare Reilly, of PensionBee, which offers a ‘green’ pension fund, says: ‘As an investor you will need to consider if the potential returns of your investments are likely to be greater than any additional money you may spend in fees.

‘A fee saving of just 1 per cent a year can have a huge impact on the ultimate pension pot you will retire with.’

9. Does the green fund you are looking at have external verification?

Increasingly, there are organisations that research and vet sustainable funds and give them their seal of approval.

For example, investment platform Interactive Investor ranks its sustainable funds according to an ‘ACE’ investment criteria – ‘avoids, considers and embraces’.

A new platform called The Big Exchange, set up by The Big Issue, focuses on ethical and sustainable funds and ranks them gold, silver and bronze.

10. Does the green fund make a profit?

Let’s not forget the whole point of investing – which is to build up wealth for the future. One must check not only the fund’s green credentials but also its actual investment performance.

Laith Khalaf, head of investment analysis at fund platform AJ Bell, says: ‘It’s important not to let the perfect be the enemy of the good.

‘You’re never going to find a fund that totally reflects your ethical outlook, but finding a reasonably good fit should provide you with peace of mind without scrimping on performance.’