Environmental, social, and governance (ESG) investing is growing in exponential fashion, and any time that happens with a particular asset class, criticism follows.
That’s happening with ESG with much of the derision focusing on fund companies serving up too much in the way of ESG labeling, a practice known as greenwashing.
“Given the increase in the number of sustainable funds and the range of approaches they employ, investors are asking whether fund managers are making misleading or unsubstantiated claims about the sustainability characteristics and benefits of their investment products,” says Morningstar analyst Jon Hale. “Investors may feel disappointed or even cheated to find that the sustainable funds they have selected are not delivering the benefits the funds seemed to promise.”
For investors looking to use exchange traded funds to integrate sustainability into their portfolios, the Goldman Sachs Future Planet Equity ETF (GSFP) is an idea to consider because, put simply, GSFP has a targeted objective, which minimizes the room for potential greenwashing.
The actively managed GSFP allocates to companies “with solutions to reduce greenhouse gas emissions required across many different activities,” according to Goldman Sachs.
“Greenwashing is generally seen as intentional, occurring when asset managers overclaim and oversell what they are actually providing. Such practices are clearly problematic and corrosive to long-term trust and credibility,” adds Hale.
As it pertains to GSFP, that interpretation of greenwashing is relevant because the Goldman Sachs fund does not fit into this box. GSFP isn’t overselling what its strategy is capable or exaggerating the environmental business prospects of its holdings. Looked at differently, if investors focus on GSFP telling them what it does — invest in companies with carbon reduction focuses — they’re unlikely to levy claims of greenwashing.
Another important attribute of GSFP is that the fund isn’t directly purporting to fit the sustainability bill. While GSFP has sustainable traits, the fund not being overtly framed in this manner is another way in which it can keep critics at bay and not be misrepresented to investors.
“What is sometimes seen as greenwashing, however, may not be intentional but instead result from differing definitions of ‘sustainability’ and/or a mismatch between an investor’s expectations and the specific approach used by a sustainable fund,” according to Hale. “This is even more of a challenge because there are no universally agreed-upon definitions for ‘sustainable,’ ‘green,’ or ‘impact’ investments. An investor with a specific, even personalized, idea of what a sustainable investment should look like may assume that any sustainable fund would be consistent with that view.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.