With impact investing now a $228 billion business, a debate is growing about whether some asset managers engage in “impact washing” to attract investors while making investments that don’t meaningfully address environmental, social, or governance (ESG) issues.
Here’s a look at the debate over bad faith ESG marketing and one international organization’s suggestions for improving impact management.
The Impact Washing Debate
In his cover letter for the 2018 Annual Impact Investor Survey, Global Impact Investing Network (GIIN) research director Abhilash Mudaliar included “industry integrity” as one of the noteworthy topics illuminated by the survey’s findings.
Specifically, 80% of respondents said that more transparency around impact investing strategies and results would help reduce the risks of impact washing or “industry mission drift.” Forty-one percent pointed to “third-party certification of what qualifies as an impact investment,” while others said that “shared principles” or a “code of conduct” could help address potential impact washing issues.
Concern may stem in part from controversies reported in the media. For example, in June 2018, one Wall Street investment bank opened an index fund based on ESG principles. As The Guardian reported, after the fund’s extremely successful launch, critics charged that it invested in companies that have suppressed global climate research and underpaid workers, among other violations of ESG principles. The consequences of false claims and bad press could go beyond individual cases: especially when they’ve garnered significant attention and investments, funds that fail to follow through on their sustainability claims could diminish the credibility of impact investing.
Asset managers have expressed concern about the possible misuses of ESG marketing, too. “We are very concerned about impact washing,” Mark Haefele, global chief investment officer of UBS Wealth Management, told the Financial Times. “We have to make sure that the end-client has a clear understanding about what impact investing is, and that is why we have been very keen to have a definition.”
At the same time, 21% of respondents to the GIIN survey didn’t see a definite need for action because “the market mechanism will address the risk of impact washing.” Along these lines, ImpactAlpha editor David Bank argued that “you can’t just fake it through marketing. . . . You have to really reach those markets, deliver those products and services, and improve those lives and ecosystems to grab the impact alpha.”
While acknowledging the importance of accountability, Bank also warned that debates about impact washing could ultimately be counterproductive for impact investing. “Creating barriers to entry” could deprive the industry of valuable “proof points, possibilities, and constituencies for further efforts.”
The IFC’s Nine Principles for Impact Management
Still, with a fair portion of GIIN survey respondents looking to some form of third-party certification or shared principles to counteract the risks of impact washing, the stage is set for attempts to standardize the industry. One recent effort comes from the International Finance Corporation (IFC), a part of the World Bank Group dedicated to organizing private sector investments in developing countries.
In an early draft of a new report called Investing for Impact: Operating Principles for Impact Management, the IFC put forward nine principles it believes should be used in the impact investment process. Informed by best practices from a variety of sources, the principles aim to “provide a reference point against which the impact management systems of funds and institutions may be assessed.” The IFC envisions investors using the principles to evaluate both potential and existing investments at multiple levels, from institution to fund to investment vehicle.
The report breaks the nine principles into a five-element end-to-end process, including:
- Strategic intent: Defining impact objectives in alignment with investment strategy (principle 1) and managing impact and returns at the portfolio level (2).
- Origination and structuring: Establishing the investor’s role in creating impact (3), as well as assessing each investment’s expected impact (4) and managing the risks of each investment’s possible negative effects (5).
- Portfolio management: Overseeing each investment’s impact performance against planned objectives, intervening as necessary (6).
- Impact at exit: Both conducting thoughtful exits (7) and articulating newly learned best practices and takeaways (8).
- Independent verification: Disclosing and verifying alignment with the principles (9).
While the draft itself goes into more detail on each principle, IFC chief executive Philippe Le Houérou said he is planning on releasing the finalized text at a meeting of the World Bank Group in April 2019. Le Houérou compared the need for impact criteria to the call for universal standards for green bonds a decade ago. “The question then was how do you avoid ‘green washing,'” Le Houérou said, “and now how do you avoid ‘impact washing.'”
The IFC hopes that offering a way to measure and quantify impact investments will help “bring into the tent all the goodwill that there is out in the market,” according to Le Houérou.
It remains to be seen who will sign on to the principles when they’re finalized, or how they will ultimately help protect the integrity of the impact investing industry. But they’re already helping give shape and substance to the impact washing debate.