With growing concern we observe that in the course of the boom of sustainable investments, especially in the field of impact investments, the danger of impact washing has strongly increased, partly enabled by unclear regulatory frameworks. Providers of investment funds in particular are increasingly advertising the positive social or ecological impact of their investments. In doing so, they often refer to the Sustainable Development Goals (SDGs) of the United Nations and use various instruments to demonstrate the positive impact of their investments.
The sometimes controversial and potentially misleading representations of impact, which in some cases are linked to intent and measurability, lead to a decline in trust in the industry as a whole. This also affects the credibility of those market participants with a long-standing commitment to impact investing and financing, and makes it more difficult for much-needed capital to flow into sustainable sectors.
For this reason, together with GLS Investments and other experienced sustainability houses, we have developed the “Guidelines for the Transparent Presentation of Impact” to ensure greater market transparency.
Six questions to prevent impact washing
We encourage all market participants to communicate honestly and openly how positive social and/or environmental impact can be achieved and what the limitations are. In particular, we recommend that providers of impact investments take a stand on the following questions:
1. who is responsible for impact: investor or investment?
It is crucial who is responsible for the social-ecological impact. Do not talk about “Our Impact” if it is solely about the impact of portfolio companies, especially in the securities sector. Therefore, show the capital flows transparently. Make a clear distinction between capital flows to companies that can have a positive impact, and secondary market transactions in which securities merely change hands without any demonstrable impact on the company.
2. What are the actual impact potentials of your investment? Where is social or environmental value added?
Clearly demonstrate your contribution, especially in dialogue with companies in which you invest. What demands have you made on the companies? Can positive changes in the company actually be attributed to your “commitment”? Have you also sold a stock when the dialogue has not been successful?
3. Are your impact scoring models understandable to investors and not misleading?
Do not suggest that you can use complex, unrealistic models to measure impact or contribution to the SDGs. The term impact means contribution to societal change. It is thus characterized by a long-term, societal perspective, not by the improvement of individual ESG metrics. Therefore, to achieve impact, clear social-ecological objectives are needed that are guided by planetary guardrails and social foundations, not by relative ESG metrics.
4. Are you referring to specific impact indicators?
Revenue is not an impact. Explain to your investors that financial metrics are not enough to determine specific impact. Also use impact indicators that are appropriate to measure your contribution to achieving specific social or environmental goals. Make it clear how the indicators are calculated. 5.
5. Do you also limit the negative impact of your investments?
Ensure, e.g. through strict exclusion criteria, that you avoid negative impacts in your investments as far as possible, such as high greenhouse gas emissions, poor working conditions or dubious tax saving schemes.
6. Do you handle the SDG icons responsibly?
Do not use the SDG icons in an abusive or misleading way. With reference to the wording of the UN resolution of September 25, 2015 and individual SDG sub-goals, explain how you contribute to a particular SDG.
We encourage providers of impact-oriented investments to consider these recommendations when presenting impact. In this way, you create the basis for investors to be able to understand and transparently assess the actual contribution of a company or fund to sustainable development. In this way, you as a fund provider and market participant help to establish trust in impact investing. The great potential that impact investing has for the sustainable transformation of our economic system
and the achievement of the SDGs must not be lost because it has been misused for marketing purposes.