"Of course, there is no perfect way to invest ethically..."
Fund Greenwashing – the secret the UK investment industry would rather you did not know; but there are alternatives


For the past 10 years, SCM Direct has written numerous reports exposing dubious practices and irresponsible behaviour in the City, many of which are open secrets within the industry but for reasons of conflict of interest, most people turn a blind eye to.  Sadly, the regulator, the FCA, is no better, spouting platitudes but repeatedly fail to ensure consumers are being treated fairly or protected, through a ‘closing the door after the horse has bolted’ attitude. It, therefore, falls to investors to protect themselves, and that requires them having the necessary information.

In terms of the growing trend in Ethical, ESG (Environmental, Social, Governance) funds there is no denying that investors have the opportunity of being responsible by both being prudent, as well as using their money for positive change.  However, there is an even greater responsibility on the ethical investment sector to ensure their investment products are as genuine, measurable and transparent as possible. Of course, there is no perfect way to invest ethically or otherwise and naturally, there will always be drawbacks to any investment or investment strategy, but clients should be able to decide fairly based on considered analysis, rather than emotive and misleading marketing.

Our recent Greenwashing Report highlighted issues which every investor should be alert too and consider before investing:

1. Many fund managers and advisers rely on external data providers data when choosing or analysing green funds for clients whose classifications can be misleading.

For example, SCM discovered that Fidelity was allowing clients to choose Fidelity “socially responsible funds” from a long list of funds when it transpired only a handful really lived up to this description.  Their data came from Morningstar and since we highlighted this, Fidelity has changed their system and are looking into potentially compensating clients [1].  However, as at 11th October 2019, Morningstar continues to show the same “socially conscious” data flag for many other funds (apart from Fidelity funds) to UK advisers using its Adviser platform, some of whose classification also appears misleading. This is important as 52% of advisers who use third-party research for their fund due diligence use Morningstar. [2]

An adviser searching for “socially conscious funds” would still find many funds which are not really ESG funds in our view e.g. the Aviva UK Listed Equity Unconstrained fund appears on a search for “socially conscious” funds.  The top 10 holdings [3] as at 31 August 2019 included a 3.9% holding in the tobacco stock, BAT and a 3.6% holding in the gambling stock, 888 Holdings.  The fund seems to have been classified by Morningstar as a socially responsible fund because its Prospectus [4] refers to ESG factors being integrated into the investment process, but of course this is not the same as being a specific ESG fund where such factors are paramount.

It must be said that as soon as Fidelity was made aware of our findings, they reacted quickly and fairly.  This is in sharp contrast to many within the industry that continue to be in denial and to come up with intellectually bankrupt excuses for their lack of a moral compass – see later.

2. Well known companies e.g. Tesla can have completely different ESG (Environmental, Social, Governance) scores depending on which firm analyses them [5]. For example, Tesla is ranked top of the industry by one firm and the worst by another.  One firm gave Tesla a near-perfect score for environment, due to its emphasis on the low carbon produced and its clean technology whilst another gave it a “zero” on environment as it only rates the emissions from its factories.

3. The ethical portfolios or products you are offered might just include a handful of specifically ethical funds, the rest may be plain vanilla government bonds. For example, SCM found that Nutmeg offers clients a low-risk SRI (Socially Responsible Investing) Portfolio in which an astonishing 95.7% is invested in a plain vanilla UK Government Bond fund and just 3.3% in a fund that specifically invests in SRI securities.

Personally, I find it very hard to justify this as a green fund rather than effectively a UK government bond fund. It seems reasonable to think that an investor would expect their green portfolio to be populated predominantly by green securities or funds.  The justification given to the Sunday Times [6] by Nutmeg was that its portfolio was “not representative of its range of ethical portfolios” but the fact remains that it is still being offered to clients.  If the view is that it is not appropriate, should it be offered to clients AT ALL?

Similarly, the feeble excuse offered by Wealthify to the Sunday Times for the fact that 52% of its Ethical Cautious portfolio was made up by government bonds (even US Government bonds) was that “Governments contribute to healthcare, education, infrastructure and public services.”  Again, so what? Is the fact that the UK government receives substantial revenues from tobacco, alcohol, gambling and military businesses to be ignored? Wealthify itself says it will exclude companies “that profit from ‘sin sectors’ such as gambling, tobacco, adult entertainment and weapons among others[7] and that government bonds “will be subject to the same strict screening criteria as shares”.

4. Many ethical funds are stuffed full of so-called ‘sin stocks’ – tobacco, alcohol, gaming and defence stocks. For example, the L&G Future World ESG UK Index [8]Invests in shares of UK companies as represented by the Index, which is alternatively weighted to give greater weight to companies that score well against environmental, social and governance criteria.” According to Bloomberg, as at 31st August 2019, 11.4% of the fund was invested in tobacco, alcohol, gaming and defence stocks.  The excuse given by L&G to the Sunday Times was that it was “designed for clients who want to express a conviction on [ESG] themes” and that “Ethical investing typically involves the blanket exclusion of whole sectors from a portfolio . . . such as tobacco, gambling and alcohol.”  Again, if L&G believes that ethical investing involves the blanket exclusion of sectors e.g. tobacco, gambling and alcohol, it begs the question of why it markets a fund that does not have such a blanket exclusion.

But it doesn’t have to be like this.

The good news for ethical, socially conscious investors is that there are good ESG funds or firms in the sector, but investors need to be aware of what to ask to find them. Here are three important questions:

  1. Ask which sectors of the economy you refuse to invest in? Investing slightly less than others in something unethical does not seem the right answer here.
  2. Ask for the actual names of the companies that are invested in? Of course, people will have different opinions on whether Boeing or British Aerospace or BAT are companies they want to be invested in, but surely the clients should be allowed to know the full list so they can decide for themselves.
  3. Ask why the company is investing in Government bonds? Can they justify it, and does it really stack up or is it simply because they can’t find enough ethical bonds or shares to fill up the fund or portfolio?

Our own proposition can be found here – SCM Direct Ethical Portfolio

and our 1,2,3 are:

  1. We only invest this portfolio in Environment, Social, Governance (ESG) or Socially Responsible Investing (SRI) funds.
  2. Our analysis goes ‘under the bonnet’ in order to screen out any fund with significant exposure to securities (be it shares or bonds) involved in the tobacco industry, nuclear weapons or Antipersonnel Mines, adult entertainment, gambling and civilian firearms.
  3. Last but not least, we are fully transparent and publish all underlying securities on our website, updated monthly.


SCM Direct is the trading name of SCM Private LLP. SCM Private LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. Company registered in England and Wales, no. OC342778. The value of investments can go down in value as well as up, so you could get back less than you invest. Exchange rates may cause the value of overseas investments and income from them to rise and fall. It is therefore important that you understand that past performance is not a guide to future returns.

SCM Private does not give personal advice.


[1] https://www.ftadviser.com/investments/2019/11/04/advisers-warned-of-esg-glitch-on-fidelity-platform/
[2] https://www.moneymarketing.co.uk/investment-research/#
[3] Link 3
[4] Link 4
[5] https://www.wsj.com/articles/is-tesla-or-exxon-more-sustainable-it-depends-whom-you-ask-1537199931
[6] https://www.thetimes.co.uk/article/the-ethical-funds-that-plough-your-cash-into-tanks-tobacco-and-big-oil-h9ftbrl6g
[7] https://www.wealthify.com/ethical-investing
[8] https://www.legalandgeneral.com/investments/funds/full-fund-range/future-world/future-world-esg-uk-index-fund

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