Are Green Mutual Funds Real?

Environmental, social and governance (ESG) mutual funds have increased substantially over the years with an influx of climate-themed products in the global economy.

A recent report by Influence Map stated that ESG funds maintained value at $1.7 trillion in 2020. However, there are increasing concerns about the quality, transparency and reliability of green products in alignment with the Paris agreement.

The report found many shortcomings, such as a lack of search term regulations in financial databases causing many ESGs to stray from global climate targets. Greenwashing is also prevalent in ESGs — a practice in which businesses market their sustainability practices when, in reality, their initiatives have little effect on the environment.

Approximately 72% of investors in the United States are wary of companies’ ESG promises, feeling progress is often exaggerated with companies unwilling to follow through on net-zero climate plans. This has led many to question if ESGs are really worth investing in.

What Are Green Mutual Funds?

Green mutual funds are investment funds focused primarily on environmental ESG criteria. The information used to increase a company’s score could include the following:

  • Energy consumption, its source and environmental impact
  • Waste generation and disposal practices
  • Natural resources conservation initiatives
  • Animal welfare
  • Carbon emissions and government regulations compliance

Generally, green mutual funds assemble a portfolio of businesses with positive environmental impacts. This could include contributing to energy research and utilizing sustainable materials and other environmentally friendly technologies.

Green mutual funds could benefit businesses by enhancing transparency with stakeholders, strengthening consumer and employee relations, attracting investors and helping align products with industry standards.

On average, 25% of shareholders prioritize sustainable investment strategies, dictating a company’s standards from supplier sourcing to manufacturing.

Typically, green mutual funds pertain to eco-friendly building and efficiency sectors and renewables, including solar, wind, battery and energy storage technology. Avoiding businesses that utilize fossil fuels and misuse natural resources is central to these types of ESGs.

An example involving green fund assets may include optimizing a sustainable public transportation sector, as city dwellers seek to ditch their cars to reduce emissions and opt for a more sustainable mode of transport.

Are Green Mutual Funds Worth the Investment?

The Net Zero Asset Managers initiative launched in December 2020 and now has 73 signatories representing $22.8 trillion worth of assets. These asset managers have committed to investing in companies that seek to reduce greenhouse gas emissions by 2050, meeting international targets to limit global warming to 1.5 C.

Caution surrounds green mutual funds for various reasons, but climate-themed ESGs can lead to positive environmental impacts. For example, they can reallocate funds from emissions-producing companies to those making net-zero gains. Essentially, climate-focused investors influence business practices and policies for necessary industry changes.

The fund industry can improve the effectiveness of green mutual funds in several ways. Honing in on appropriate climate-themed ESG search terms and branding will help investors determine if a company aligns with their objectives.

More stringent regulations are also required to enhance transparency regarding product sustainability. For example, the European Union launched the Sustainable Finance Disclosure Regulation (SFDR) in March 2021, developing metrics that emphasize company disclosure about investments’ harmful environmental impacts.

The U.S. may be behind Europe regarding ESG regulations. However, a task force developed by the U.S. Securities and Exchange Commission (SEC) currently oversees investigations into misconduct claims about companies’ sustainability.

Greenwashing is undoubtedly an issue that needs to be addressed in the fund industry. ESG criteria demand companies commit to long-term environmental and social initiatives. Nevertheless, green mutual funds are seemingly worthwhile, with the current wave of ESGs resulting in positive ecological outcomes.

Sustainable Investments for Greater Impact

Green mutual funds are socially responsible investments with a tremendous impact on the planet’s future. They help identify companies that develop initiatives for optimal long-term sustainability performance, paving the way for a greener tomorrow.