ESG funds – 3 popular myths and why they don’t stand up to scrutiny

In November, world leaders will meet at Egypt’s Sharm El-Sheikh for the UN climate change conference, otherwise known as COP27. The two-week summit will see world leaders, politicians and experts gather to discuss the climate crisis and how to tackle it.

It’s not only those in power who are keen to address climate change. According to a YouGov study, most Europeans are worried about global warming. It found that 83% of adults in Italy said they were concerned about the environment, followed by 77% of adults in both Spain and France.

Additionally, two-thirds of Germans said they too were worried, as well as 62% of adults in Denmark. Another example of how seriously Europeans take the issue of climate change could be their attitude towards “sustainable” investments, otherwise known as Environmental, Social and Governance (ESG) funds.

According to financial intelligence company Qontigo, Europe accounted for almost all of new assets invested in ESG funds in the first half of 2022. That said, a report by Morningstar shows that 29% of investors who have not placed money into ESG funds believe sustainable investing is important.

So why are they not invested? One reason might be because of popular myths that exist about ESG funds, which don’t necessarily stand up to scrutiny. Read on to discover three.

1. It’s a passing fad

Awareness of humankind’s impact on the planet has grown significantly in recent years. With increasingly severe weather, such as 2022’s heatwave and wildfires in Italy, the challenges created by climate change are unlikely to end anytime soon.

As such, people’s desire to reduce their impact on the planet by investing in ESG funds may not end any time soon either. And while there have been concerns that the energy crisis of 2022 means sustainable investing has fallen out of favour, a report by the Nasdaq makes interesting reading.

It reveals that research by PricewaterhouseCoopers (PwC) shows demand remains strong for ESG funds in 2022, with 80% of investors planning to increase exposure to them in the next two years. Furthermore, it suggests ESG assets in the US are likely to more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026, while Europe’s ESG assets will increase 53% to $19.6 trillion.

2. It will reduce returns

According to a report by Morningstar from February 2022, in the five years up to the end of 2021, ESG funds had performed on a par with, or better than, conventional funds. Furthermore, the European Securities and Markets Authority (ESMA) revealed that in the 10-year period ending in 2020, ESG funds outperformed conventional investments and were also overall cheaper.

While past performance can never be used to guarantee future performance, the belief that ESG funds reduce growth potential may not stand up to scrutiny.

3. ESG funds are “greenwashed”

According to Triodos Bank UK, 26% of consumers would not invest in ESG funds because of fears of “greenwashing”. This is where unsubstantiated or misleading claims are made about the sustainable credentials of an investment.

While this can happen, it would be wrong to assume that all ESG funds are greenwashed, as bona fide investments certainly exist. One way to avoid falling foul of greenwashing is to work with a financial planner, although care must be taken, as not all advisers have extensive experience in dealing with ESG funds.

This means they may not recognise a fund that has been greenwashed. As we at Black Swan Capital have many years’ experience dealing with ESG funds, we can help you sidestep any that might not stand up to scrutiny.

Financial advisers now must score your attitude to ESG funds

In August 2022, European regulations changed, meaning financial planners must now classify a client’s attitude to ESG and take it into consideration when making investment recommendations. This is why we have adopted the following 1 to 5 scale to ensure we fully understand your views on ESG funds.

1 – Exclude ESG targeted funds from your portfolio

2 – Only include ESG funds if there are no other non-ESG investments available

3 – Neutral, in that you are indifferent as to whether ESG are included in your portfolio

4 – Include ESG funds as a component of your portfolio if available

5 – Only include ESG funds as part of your portfolio.

We believe this will help provide you with peace of mind that any investments we discuss or recommend will meet your financial and ethical aims. If you’re a client and we have not already spoken to you about your attitude to ESG funds, we will do so during your next review.

Get in touch

As specialists in helping expats in Europe, and with our extensive experience in ESG funds, we would be happy to discuss any investments you might be interested in. If you would like to discuss this or your wider wealth, please contact us on info@blackswancapital.eu as we’d be happy to help.

Please note

This article is for information only. Please do not take action that is based on anything you read in this article until you have sought professional advice.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.