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    Reclaiming the Word Impact for its Rightful Owners

    Stockholm (NordSIP) – The NordSIP Laundromat machines have a range of programmes.  So far we have run the green washing and sports washing ones, but what about this impact wash button?  That was added to the machine following the growth in popularity of sustainability especially among a new generation of millennial investors, 88% of whom expressed an interest in climate-related investments in a recent survey.  Amidst the scramble to market investment products to this potentially lucrative market, some fund providers have made rather liberal use of term impact.

    There continues to be much debate among think tanks, non-governmental organisations, regulators and policy makers about the terminology and taxonomy to use in marketing sustainable investment products to institutional and retail markets.  In simple terms, impact investing implies seeking to achieve positive non-financial outcomes alongside a financial return.  The latter point differentiates impact investing from philanthropy, but they are close in concept.  The accusations of impact washing arise when investment funds simply favouring companies with a high ESG rating or with a lower carbon footprint present themselves as impact strategies.  Retail investors may be convinced that they are “making the world a better place” by putting their savings in these products, but it is by doing less harm rather than making a real impact.

    The Global Impact Investing Network (GIIN), a non-profit organisation that has spent over a decade trying to increase the effectiveness of this corner of the market, has provided clear criteria for investments to be classed as impact.  The first thing investors need to look for is intentionality.  This means that fund providers cannot claim positive environmental or social outcomes after the fact.  Specific measurable benefits must be set out by the fund manager in advance in the form of a theory of change, and then reported on accurately along with evidence of causality.  There needs to be proof that positive outcomes were obtained that without this investment would not otherwise have happened.  Finally, the best way for impact investment to make it through the laundromat and come out squeaky clean is with independent expert verification on a regular basis.

    Fulfilling all these criteria is easier within private markets, thanks to majority ownership stakes, direct influence over management and much easier access to data.  There has nevertheless been a growth in listed impact strategies, which are more scalable and can better accommodate the growing demand for these types of strategy.  While some products do stand up to scrutiny, others are taking advantage of the varying interpretations of the term impact to join the bandwagon.

    European sustainable finance think tank the 2 Degrees Investing Initiative (2DII) has been working hard to influence policymakers to set out a rock solid and consistent definition of impact across the Sustainable Finance Disclosure Regulation (SFDR), EU taxonomy and retail focused ecolabel standards.  One example of the importance of terminology that is highlighted by 2DII is the conflation of the concept of “alignment with” and “contribution to” the Paris climate goals.  An investor can improve the climate alignment of their portfolio by reallocating to better aligned companies.  However, it is only by engaging with firms and directly causing them to reduce their emissions that an investor can claim to be contributing – or having an impact on – the Paris goals.  It is still a work-in-progress, but a clearer understanding of what constitutes genuine impact investing will help eradicate impact washing and restore confidence in a sector of the sustainability market that can make the world a better place – and prove it.

    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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