The Financial Inclusion Centre today (10th April 2024) publishes a new report Making an impact or making a return? which evaluates the burgeoning social impact and sustainable finance sector and finds a significant risk of ‘impact washing’.
The summary report can be found here: FIC social impact finance April 2024 summary report The full report can be found here: FIC social impact finance April 2024 full report
The new report sets out six tests (see below) and policy recommendations to address these risks. The tests allow stakeholders to distinguish between finance that prioritises making a positive social impact, sustainable finance that makes a positive impact while making returns, socially harmful finance, and potential impact washing.
The financial sector increasingly tells us it is no longer just about making profits or generating returns for owners and investors; it says it wants to make a positive social impact as well as making financial returns.
This new report concludes that it is too easy for conventional return-maximising finance to masquerade as social impact or sustainable finance and too easy for financial institutions to impact wash activities to bolster reputations. Social impact washing does not get the same attention as its twin, greenwashing.
The lack of robust standards and scrutiny applied to the sector undermines the efforts of those financial institutions that do want to make a real social impact and the integrity of the market generally. Worryingly, the Centre fears the Financial Conduct Authority (FCA) flagship sustainable investment label[1] could actually enable impact washing.
The six tests cover:
Forgoing market returns – To be classified as social impact finance, financial institutions should be willing to forgo market level returns.
The role of corporate welfare – To qualify as social impact or sustainable finance, there should be no corporate welfare involved.[2]
Standards of corporate behaviour – Financial institutions should drive the highest standards of corporate behaviours on social issues such as human rights, fair wages, diversity and inclusion, and working conditions in supply chains, not just meet minimum acceptable standards.
The Do No Harm Principle – Finance should follow the do no harm principle. Finance which produces a positive social impact in one area should not cause harm in another.
Social sector assets – Financing ‘social sector’ or ‘inclusion’ assets (e.g. social care, social housing, education, levelling up, and community lending) should not be automatically classified as social impact or sustainable finance unless the other conditions are met.
Development finance – Domestic or overseas ‘development finance’, such as investing in deprived areas of UK or Low and Middle Income Countries (LMICs), should not be automatically classified as social impact unless the other tests are met. This applies to catalytic and blended finance.
Malcolm Hurlston, Chairman of The Financial Inclusion Centre said: ‘Many investors want their money to make a difference as well as give them a return. The six tests set out in this report will help them invest with confidence.’
Mick McAteer, Co-Director of The Financial Inclusion Centre said: ‘If the history of finance tells us anything it is that harm follows the money. The growth of the sustainable finance market increases the risk of impact washing. With these new tests, impact washing can be spotted more easily by stakeholders.’
For further information please contact Mick McAteer on mick.mcateer@inclusioncentre.org.uk
Ends
Notes to editors
The policy recommendations are:
- The FCA should have a clear strategy for combatting social impact washing separate from greenwashing. Social impact should have its own specific sustainability label.
- The asset minimum to attract an FCA social sustainability label should be the 80% threshold used in other major financial jurisdictions.
- Robust social impact standards should be rapidly rolled out to other financial activities, not limited to investment funds.
- A comply or explain approach is not sufficient. Firms should be required to choose from an approved list of benchmarks when making claims about social impact or sustainability.
- The FCA’s labelling regime provides firms with too much leeway to mark their own homework on compliance. Civil society organisations should develop a ‘gold standard’ for financial and corporate behaviours on social issues. Compliance with this gold standard should be independently verified.
- UK policymakers should develop a regime to allow evaluation of offshore and overseas funds given the international nature of finance based in the UK.
- UK policymakers should consult with civil society organisations to develop a similar framework and tests for development finance, catalytic and blended finance targeted overseas.
[1] Sustainability disclosure and labelling regime | FCA
[2] Corporate welfare includes financial commitments being deregulated, ‘de-risked’, or incentivised by governments and others such as non-governmental organisations (NGOs).