Neither clean nor green – ‘sustainable’ funds falling short of investors’ expectations, Which? reveals

Many funds that describe themselves as ‘sustainable’ are falling short of investors’ expectations by backing firms linked to fossil fuels and deforestation, Which? research has found.

Sustainable funds – often referred to as Environmental, Social and Governance (ESG) funds – have become one of the fastest growing sub-sectors in the investment industry. In 2021, of the £43.2 billion that was invested into retail funds by UK investors, £16 billion was put into ‘responsible funds’, Investment Association figures show.

There are many labels for investments that consider more than just profits, but Which? research suggests there is often a mismatch between what investors understand to be “ethical” and the fund management industry’s definitions.

The consumer champion surveyed 289 of its members who invest in ESG funds and found that most were fairly or very confident their fund was not investing in fossil fuels (67%), weapons (79%), tobacco (81%) or companies that contribute to deforestation (66%).

However, when Which? looked at the holdings of leading ESG funds, it found that some included massive oil companies and firms linked to deforestation.

BlackRock’s iShares ESG Aware MSCI USA, one of the biggest ESG funds in the world both in terms of assets under management and investor inflows, includes fossil fuel giants Chevron and Exxon Mobil among its holdings.

Investment platform Vanguard’s ESG Developed World All Cap Equity Index Fund (UK) – which was among the most-bought ESG funds on the platform Interactive Investor in 2021 – invests in McDonald’s, Mondelez and Nestlé. All three companies have supply chains linked to the destruction of the Amazon rainforest.

BlackRock and Vanguard defend their investments in the likes of Chevron and McDonald’s on the grounds that these companies have committed to net-zero emissions by 2050. So by investing in these companies, the fund managers argue, people can participate in the transition to a green economy.

However, only two per cent of those surveyed said their favoured ESG strategy would be investing in controversial companies to encourage them to become more sustainable. The majority (64%) said they wanted to invest in companies that aim to improve society or the environment.

Since Which? carried out the research, Russia’s invasion of Ukraine has increased the pressure on individual investors to consider where their money is going.

The wide range of ESG fund strategies can leave would-be and current investors perplexed. Of the 289 investors Which? surveyed, one fifth (21%) were unable to state their ESG fund/trust’s investment approach.

Which? research shows that expecting every investor to carry out a high level of due diligence is impractical. Among the ESG investors the consumer champion surveyed, a little under one fifth (18%) admitted that they did not try to access information about the fund’s ESG strategy before investing.

There is further evidence which suggests that investors do not carry out in depth research of their funds. For example, just eight per cent of investors in Which?’s survey read the annual reports, which are often the only place to find a fund’s full holdings listed.

The Financial Conduct Authority (FCA) has taken steps to standardise ESG definitions. However, without standardised labels and minimum standards, the onus still falls on investors to spot greenwashing.

When Which? presented investors with new labels for sustainable investment funds, proposed by the FCA, most said they understood the labels – but a fifth (20%) said they did not understand most of them. Eight per cent said they did not understand any of the proposed labels.

The majority (69%) of investors said they would be in favour of minimum standards for what makes an investment an ESG.

As part of its ESG strategy, the FCA also plans to require intermediaries to take sustainability issues into account when advising clients. Only 17 per cent of people said their financial adviser had initiated a conversation about sustainable investments, Which? found in a separate survey of 4,989 of its members.

Jenny Ross, Which? Money Editor, said:

“Investors want to know that when they put their money into ESG investments, they’re investing in a more sustainable future, but this research suggests something quite different.

“We found that many such funds are falling short of investors’ expectations, which could leave some customers shocked by the companies and industries they are unknowingly backing.

“To help investors make more informed decisions, there must be transparent information for ESG funds, to prevent conscientious consumers from putting their money into funds that don’t do what they say on the tin.”



Which? surveyed 7,375 of its members who have investments, 289 of whom held an ESG fund. Fieldwork took place between 17th January 2022 – 28th January 2022

In a separate study, Which? surveyed 4,989 of its members who had taken financial advice. Fieldwork was carried out in February 2022

Rights of replies

Vanguard on ESG funds:

“Vanguard’s ESG Index fund range is designed to track indices constructed by third party benchmark providers, based on their independent expertise. These indices use transparent exclusion measures to screen out companies based on set environmental, social and governance criteria, as assessed by the benchmark provider.

“The Vanguard ESG Developed World All Cap Equity fund follows a FTSE Global Choice ESG benchmark which excludes companies involved in non-renewable energy, vice products, weapons and companies with UN Global Compact related controversies (i.e. companies which do not meet the labour, human rights, environmental, and anti-corruption standards as defined by the United Nations Global Compact Principles). Companies are monitored on an ongoing basis, and those that do not meet these standards are excluded.

“When assessing ESG products, it is important for investors to pay close attention to a fund’s objective and screening approach to make sure it fits with their values and preferences. If, however, an investor is unsure, we recommend they seek advice to help them select a product that meets their specific needs.”

Vanguard statement on Investment Stewardship:

“On behalf of Vanguard’s funds and investors, our Investment Stewardship team engages with executives and boards at our portfolio companies, whether held through a traditional or an ESG fund. If a company does not make progress in addressing risks to long-term business sustainability, such as deforestation, we will hold them accountable through engagement and our voting power as a shareholder. In addition, Vanguard is a signatory to CDP Forests, an effort to advocate for better disclosure of deforestation risks by public companies.”

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