With growing emphasis on social and environmental outcomes, charities are increasingly extending their missions into the world of impact investing. This trend, accelerated by cases like Butler-Sloss and the corresponding update to CC14, shows charities are connecting their purpose more closely with their financial strategy.
Yet, as impact investing gains momentum, so does the risk of “impact washing” – where asset managers embellish or misrepresent the true impact of their strategies.
At Aon, through over 2,500 annual manager meetings, we have noticed common practices often associated with impact washing, even when no universally agreed definition exists. But as impact investors, charities have a duty to distinguish real impact from mere promises. Here are a few key practices to watch out for.
Confusing ESG integration with impact
While environmental, social and governance (ESG) integration addresses the financial risk associated with ESG factors, impact investing actively seeks positive social and environmental outcomes. ESG integration is a financial consideration and a baseline that all managers should meet. Impact investing, however, is an intentional, values-driven activity.
Despite these approaches having such different objectives, it is not uncommon to see asset managers blurring these lines. For instance, some managers may present an ESG-driven strategy as one that inherently drives social or environmental impact. As investors, it is crucial to probe; ask what the objectives are of each investment and ensure the investment solutions they invest in reflect these priorities.
Trade-offs between impact and returns
Another myth circulating about impact investing is that positive social or environmental outcomes can be delivered without financial trade-offs. While some investments may indeed deliver both, such as renewable energy infrastructure, it is not guaranteed.
Realistically, impact opportunities may require accepting lower returns, increased risks, or both. Not acknowledging these trade-offs can distort decision making.
Investors are always considering trade-offs between fees, liquidity, returns, risk, etc when making investment decisions. Impact investment decisions are no different.
Questioning faulty impact metrics
Measuring impact does not need to be perfect to be beneficial, however some measures are so flawed they provide a false sense of the impact the investments are making.
Measurement is essential to gauge impact, but the metrics must be accurate. For example, carbon measurement is commonly used to analyse the emissions within a portfolio. However, reducing a portfolio’s carbon footprint doesn’t necessarily translate to reducing carbon emissions in the broader economy; divesting from high-emission assets merely shifts them to other asset owners.
Metrics like carbon footprint can be valuable for companies with net zero goals or those investors aiming to disassociate from high-emission companies. However, relying on such measurements to claim “impact” can be misleading and contribute to impact washing.
Instead, investors should focus on metrics that genuinely reflect the impact of each investment and are aligned with their objectives.
The flaws in using portfolio carbon measurement as a guiding metric for impact are increasingly well-known and accepted. This is now being acknowledged in the Institutional Investors Group on Climate Change’s Net Zero Investment Framework 2.0, which describes the ideal approach of net zero investment strategies as “maximising their efforts to ‘finance reduced emissions’ rather than ‘reduce financed emissions’”.
Be diligent, be accountable
Impact investing is an exciting frontier, offering charities a means to amplify their missions and reshape industries. However, the risks of impact washing threaten to erode trust in this powerful tool.
By staying vigilant – demanding transparency from managers, acknowledging trade-offs and championing accurate metrics – charities can ensure their investments align with the values, making a difference.
