Savita Subramanian of Bank of America warned that these “extreme inflows” might create a market bubble. The MSCI World ESG Leaders index has returned four percentage points more than the standard global index over five years, potentially leaving “green” investors at greater risk of a stock market crash or future poor performance.
Higher inflation has meant a crash is a more dangerous prospect as central banks raise interest rates sooner than expected. A higher Bank Rate increases the appeal of firms already returning cash to shareholders via dividends. Stocks labelled unethical, such as oil, tobacco and mining firms, would do well in this environment, while companies that promise profits in the distant future become less attractive.
Investors also face the danger of “greenwashing” – when funds claim to have climate, social or sustainable credentials that the underlying investments do not live up to. Tariq Fancy, who was fund giant BlackRock’s chief investment officer for sustainable finance until 2019, warned that ethical investing had “little to no impact” and said insiders had called it a “marketing gimmick”.
Part of the problem is that fund groups cannot decide on what constitutes an “ethical” investment: some own oil stocks and seek to influence them to be more green from within, while others exclude them from portfolios.
The ESG minefield of higher costs, dubious sustainability claims and inflated valuations means careful scrutiny of funds has never been more important. You can check what a fund owns by consulting its “factsheet”, available online, which will name the top 10 holdings and the sectors a fund invests in.
Savers will still be able to pick their own funds if they decline the default option proposed by the provider.
The FCA said more people were buying personal pensions without advice. Some took too much or too little risk, such as keeping everything in cash.
