The Growing Concern of Impact-Washing in Social Investing
At the Academy of Life Planning, we are dedicated to fostering transparency, integrity, and true social value in financial planning. Recently, a thought-provoking article by Mick McAteer of the Financial Inclusion Centre has brought to light a significant issue in the social investing sector: impact-washing. As champions of genuine social impact, we believe it is crucial to explore and address this emerging concern.
Understanding Impact-Washing
Impact-washing is akin to the more familiar concept of greenwashing. While greenwashing involves misleading claims about environmental benefits, impact-washing pertains to investments that falsely claim to generate social impact. As the social impact and sustainable finance sector grows, so does the risk of conventional return-seeking investments masquerading as socially impactful ventures.
Weak Standards and Regulatory Gaps
One of the primary issues highlighted in McAteer’s report, “Making an impact or making a return?”, is the inadequacy of current standards used to classify social impact investments. The report suggests that these standards are too weak and that the Financial Conduct Authority’s (FCA) new sustainable investment label might inadvertently facilitate impact-washing.
The financial sector’s lobby for deregulation and corporate welfare has further complicated the landscape. These efforts have made social sector assets more commercially attractive but at the cost of genuine social impact. Private finance is stepping in to fund essential public services like affordable housing, social care, and specialist education, often at a higher cost than government funding.
The True Cost of Private Finance
The reliance on private finance to fund social assets has several repercussions. For one, private finance requires returns above the risk-free rate, making it more expensive than government funding. The report cites instances where private investments in social and student housing yielded returns between 8% and 13%. Such high returns ultimately increase the cost for residents or local authorities, creating a financial burden.
Moreover, the current approach to ESG (Environmental, Social, and Governance) finance allows financial institutions to gain reputational advantages for merely meeting societal expectations. This approach dilutes the essence of true social impact, which should go beyond mere compliance and drive significant positive change.
Defining True Social Impact
To qualify as true social impact, investments should adhere to several principles:
- Accept below-market returns, prioritising social goals over financial gains.
- Follow the “do no harm” principle, ensuring that investments do not exacerbate existing social issues.
- Drive the highest standards of corporate behaviour, going beyond basic compliance to demonstrate leadership in social responsibility.
The proposed tests for social impact investments aim to set a higher bar, distinguishing genuine social impact from impact-washing. These tests can help financial advisers, institutions, pension trustees, and managers of charitable funds make informed decisions and challenge misleading claims about social impact and sustainability.
Moving Forward
At the Academy of Life Planning, we echo the call for more stringent standards and greater accountability in social impact investing. As we strive to create a harmonious blend of financial security and social well-being, it is imperative to ensure that investments marketed as socially impactful truly deliver on their promises.
We believe that by adopting rigorous standards and prioritising genuine social impact, we can build a more equitable and sustainable financial landscape. As followers of the Academy, we encourage you to critically evaluate social impact investments and support initiatives that align with our values of transparency, integrity, and social value.
Together, we can combat impact-washing and promote investments that make a real difference in our communities. Let us champion the cause of true social impact and continue our transformative journey towards a more inclusive and sustainable future.
For more insights and to stay updated on our initiatives, follow the Academy of Life Planning. Let’s make a difference together!
Q&A: Understanding the Terms in the Impact-Washing Article
Q1: What is impact-washing?
A1: Impact-washing refers to the practice of marketing investments as having a positive social impact when, in reality, they are primarily focused on generating financial returns. This misleading practice is similar to greenwashing, where environmental benefits are falsely claimed.
Q2: How is impact-washing different from greenwashing?
A2: Both impact-washing and greenwashing involve misleading claims, but they focus on different areas. Impact-washing pertains to false claims about social benefits, while greenwashing involves false claims about environmental benefits.
Q3: What is the social impact sector?
A3: The social impact sector includes investments and financial activities aimed at generating positive social outcomes, such as reducing poverty, promoting financial inclusion, and improving social infrastructure like affordable housing, social care, and education.
Q4: What are Sustainable Development Goals (SDGs)?
A4: SDGs are a set of 17 global goals established by the United Nations to address various social, economic, and environmental challenges. They include targets like eradicating poverty, achieving gender equality, and ensuring sustainable cities and communities.
Q5: What does ESG stand for?
A5: ESG stands for Environmental, Social, and Governance. It refers to the three key factors used to measure the sustainability and societal impact of an investment in a company or business.
Q6: What is the role of the Financial Conduct Authority (FCA)?
A6: The FCA is a regulatory body in the UK responsible for overseeing the financial markets and ensuring that businesses operate with integrity and transparency. It also creates regulations and guidelines for sustainable and socially responsible investments.
Q7: What is corporate welfare?
A7: Corporate welfare refers to government support provided to businesses in the form of subsidies, tax breaks, or other financial advantages, which can make certain investments more attractive and profitable for private companies.
Q8: Why is private finance often more costly than government financing?
A8: Private finance requires higher returns to compensate investors for the risks they take, which can lead to higher costs compared to government financing, which typically seeks lower returns and prioritises public benefits over profits.
Q9: What does the “do no harm” principle mean in the context of social impact investing?
A9: The “do no harm” principle means that investments should not exacerbate existing social or environmental issues. Instead, they should strive to avoid causing negative impacts while aiming to create positive social outcomes.
Q10: What are the proposed tests for distinguishing genuine social impact investments?
A10: The proposed tests aim to evaluate whether investments truly prioritise social impact over financial returns. These tests consider factors like the willingness to accept below-market returns, adherence to high standards of corporate behavior, and the absence of reliance on corporate welfare.
Q11: Why is it important to have stringent standards for social impact investments?
A11: Stringent standards are crucial to ensure that investments marketed as socially impactful genuinely deliver on their promises. This helps maintain trust in the social impact sector and ensures that financial resources are used effectively to address social challenges.
Q12: How can financial advisers use these tests?
A12: Financial advisers can use these tests to assess the authenticity of social impact claims made by investment funds and portfolios. By applying these standards, advisers can better guide their clients towards investments that truly align with their social and ethical values.
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