Over the last decade ESG investing – where investors consider environmental, social, and governance factors alongside financial ones – has been growing in popularity. Yet, there are still significant challenges for investors when it comes to identifying which opportunities align with their ESG criteria. The Fairtrade Foundation could teach the industry some valuable lessons.
The Fairtrade Foundation works to ensure that farmers around the world earn secure and sustainable livelihoods by tackling injustice in conventional trade. It was set up over 30 years ago and the Fairtrade mark is something you’ll likely recognise from visits to the supermarket on a range of items, from bananas to chocolate.
At first glance, you may think ESG investing and Fairtrade don’t have a lot in common, but they do. From a consumer perspective, your values play a role in the decision you make.
- When you pick up a Fairtrade item when you’re shopping, you may be deciding to pay a premium or avoid other brands because you want your purchase to support often disadvantaged producers.
- As an ESG investor, you may choose investment opportunities that align with your values, or avoid those from companies that do not.
So, what could the Fairtrade Foundation teach the ESG investment industry?
1. The importance of clear standards
The Fairtrade Foundation sets clear social, economic, and environmental standards for companies and farmers across the entire supply chain. These standards include the protection of workers’ rights and a minimum pay for producers that is set by the organisation.
It means when you pick up a Fairtrade item, you can feel confident that workers in the supply chain have been treated fairly.
In contrast, definitions of ESG varies. For example, while one investment fund labelled as “ESG” may avoid fossil fuel companies altogether, another may invest in an oil firm if it’s also involved in renewable energy.
It’s an area some organisations in the industry are working to change.
The Financial Conduct Authority (FCA) consulted on proposals for a sustainability labelling system at the start of 2023. Under the proposals, ESG labels such as “impact investing” or “sustainable focus” would be defined. The proposals also include restricting the use of ESG terms in investment fund naming.
As an investor, these changes could make it much simpler to compare different ESG funds.
2. The value of independent checking
Another key challenge for ESG investors is “greenwashing” – this is where a company makes an unsupported environmental claim.
A company may claim to have reduced its carbon footprint or work closely with local communities. Or a fund may say its mission is to invest in companies that have a positive impact. But how do you verify these claims? It can involve a lot of time-consuming research and, in some cases, companies make these claims without providing the data to support them.
The Fairtrade Foundation uses an independent organisation, FLOCERT, to check its standards are being met across the entire supply chain.
While something similar would be incredibly difficult to implement across ESG investment, greater transparency could provide investors with the information they need to make a decision.
3. How to make selecting products simple for consumers
Once FLOCERT has carried out the independent checks, the Fairtrade Foundation makes it easy for consumers to see which companies meet its standards.
Firms that have passed the checks are licensed to use the Fairtrade mark on products and packaging. So, if a consumer wants to buy Fairtrade produce, they simply need to keep an eye out for the easily recognisable mark.
At present, there isn’t a simple way for investors to see which funds or companies meet their ESG criteria. As demand for ESG investing rises, it’s something that could be implemented to encourage more people to consider ESG values.
The FCA’s proposals to restrict the naming of ESG funds could be a step in the right direction. Investors would be able to see at a glance which funds could meet their needs based on the terms the fund uses.
Contact us to discuss making ESG criteria part of your investment strategy
If you want to make ESG values part of your investment strategy we can help.
We’ll work with you to identify which investment opportunities could meet your ESG criteria while balancing them with your risk profile and investment goals. Contact us to arrange a meeting with one of our team today.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.
