The world needs companies that can drive positive change at scale through innovative products, services and business models. Impact investing can spur the growth of such companies and help advance solutions to address the social and environmental challenges the world faces today.
Impact investing has been defined by the Global Impact Investing Network (GIIN) as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. To complement this definition, the GIIN’s developed four Core Characteristics of Impact Investing to outline what constitutes credible impact investing:
Building upon these core characteristics, other initiatives have emerged to provide clear reference points and help investors understand the essential elements of impact investing.
From an investor’s perspective, sustainable and impact-oriented investments embrace a broad range of strategies, from responsible investing to philanthropy.
Source: Based on the Impact Management Project, CIIP and adapted by Deloitte
Despite the increased interest in and number of product launches claiming to be impact investments, there has been little alignment on how to manage investments for impact and the systems needed to support this. This has created complexity and confusion, as well as a lack of clear distinction between impact investing and other forms of sustainable investing approaches.
Since 2019, industry standards have emerged providing clarifications for what constitutes an impact investment, helping to mitigate the risks of “impact-washing.”
An Article 9 fund is not an impact fund by default; it is defined by the Sustainable Finance Disclosure Regulation (SFDR) as having a sustainable investment as its primary objective. A sustainable investment needs to satisfy three criteria:
As these funds are considered the “greenest” funds in the marketplace, they are often assumed to be impact funds. The confusion may also stem from the SFDR text itself as Article 9 funds are referred to as financial vehicles which have as their objective “a positive environmental or social impact”3.
However, the SFDR requirements for Article 9 funds do not fully align with the core characteristics of impact investing from the GIIN. Above all, SFDR does not fully distinguish between the sustainability impact of the company in which the fund has invested (‘buying’ impact) and the investor’s positive influence on that impact (‘creating’ impact / impact management). In addition, SFDR introduced concepts such as DNSH analysis and principle adverse impacts monitoring without addressing investors’ core investment and process duties to generate a positive impact.
The practice of making misleading impact claims (so-called ‘impact washing”’) carries increasing risks.
In a sign that regulators are taking the problem seriously, the three European Supervisory Authorities (ESAs) launched a Call for Evidence on greenwashing4 which questions, among other issues, the risk of impact washing. Early June, the ESAs published their Progress reports5 in response to this consultation. In particular, the European Securities and Markets Authority (ESMA) has been assessing which areas of the sustainable investment value chain (SIVC) are more exposed to greenwashing risks – with key focus on misleading claims related to impact:
ESAs’ final reports on greenwashing will be published in May 2024 and will consider final recommendations, including on possible changes to the EU regulatory framework.
In November 2022, ESMA also published a consultation paper on guidelines in relation to funds’ names sing the word ‘impact’ or ‘impact investing’6.
In the UK the Financial Conduct Authority (FCA) will introduce in Q3 2023 a package of measures aimed at clamping down on greenwashing. This includes sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing. A new sustainable investment labelling regime for investment products will be implemented with three labels: ‘Sustainable Focus’, ‘Sustainable Improvers’ and ‘Sustainable Impact’. Products labelled as sustainable impact “will have an objective to achieve a pre-defined, positive, and measurable environmental and/or social impact”, alongside a “financial risk/return objective”7.
In the U.S. the SEC is similarly working on rules for greater clarity8. It has proposed ESG Fund definitions and distinguished between ESG integration, ESG-focused and ESG Impact funds9.
There is currently little clarity on the extent to which firms are making exaggerated or misleading sustainability-related claims about their investment products. A recent study from Novethic, published in December 2022, has however analysed nearly 200 Article 9 French funds and warned that a large majority of investors currently using the term “impact” or publishing an “impact report” do not meet the key characteristics of impact investing10.
As investors are turning their attention to impact investing, the need for a common language to combat the risk of impact washing is on the rise. The next articles in this series will look at the greatest challenges and best practices across different asset classes.
The impact investing landscape is complex, yet vital, to create measurable value for your stakeholders and build a more sustainable future. Deloitte can support your company in developing a comprehensive impact investing strategy which includes mitigating investment risk, identifying investment opportunities and accelerating your sustainable transformation. Contact us to discuss how we can help guide you and your company to drive both financial returns and positive social impact.
This article was written by Isabelle Jeannequin Morin, Director at Deloitte Switzerland specialising in impact finance and sustainable development and Ophélie Peypoux, Director at Deloitte France specialising in investment management services and sustainable finance.
1 Impact Charter, IFD : F4T_Investor-impact-charter_december-2022.pdf (institutdelafinancedurable.com)
2 Assessment grid, IFD : F4T_Fund-impact-assessment-grid_december-2022.xlsx (live.com)
3 REGULATION (EU) 2019/2088 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Text with EEA relevance)
4 ESAs Call for evidence on Greenwashing (europa.eu)
5 ESMA progress report : ESMA30-1668416927-2498 Progress Report on Greenwashing (europa.eu)
EBA progress report : EBA progress report on greewnwashing.pdf (europa.eu)
EIOPA progress report : Advice to the European Commission on Greenwashing – (europa.eu)
6 Guidelines on funds’ names using ESG or sustainability-related terms (europa.eu)
7 CP22/20 https://www.fca.org.uk/publication/consultation/cp22-20.pdf
8 Proposed rule: Investment Company Names (sec.gov)
9 Name That Boon: SEC Proposes Rules on ESG Fund Names & Disclosures (harvard.edu)
10 https://www.novethic.fr/finance-durable/publications/etude/sfdr-les-debuts-poussifs-du-marche-des-fonds-article-9.html
This article was written by Isabelle Jeannequin Morin, Director at Deloitte Switzerland specialising in impact finance and sustainable development and Ophélie Peypoux, Director at Deloitte France specialising in investment management services and sustainable finance.