The Financial Inclusion Centre’s new report evaluates the burgeoning social impact and sustainable finance sector.
The report, titled "Making an impact or making a return?", concludes that as the sector grows opportunities for ‘impact-washing’ – the twin of the higher profile greenwashing – have grown.
If the history of finance tells us anything, it is that ‘harm follows the money’. It is far too easy for conventional return-seeking investment to masquerade as social impact finance.
The standards used to determine whether investments ought to be classified as social impact are far too weak. Indeed, the Financial Conduct Authority's new sustainable investment label could actually facilitate impact washing.
What is the social impact sector?
Financial institutions constantly tells us they want to make a positive social impact along with making returns. The concept incorporates sustainable development goals (SDGs). It is the S in ESG and, along with environmental issues, it is referred to as ‘people and planet’.
Yet, these constructs do not properly convey the extent to which finance is creating new opportunities to generate financial returns while bolstering corporate reputations.
Finance lobbies claim private finance can: tackle social harms such as poverty; promote financial inclusion; invest in regeneration and levelling up; and improve standards of corporate behaviours on social issues such as diversity, human rights, fair wages, ethnicity and gender pay gaps.
A whole new category of monetisable social sector assets has emerged as the state (central and local) restricts its role in funding affordable housing, social care, specialist education, and other public services. Private finance is filling that gap.
Financial sector trade bodies have successfully lobbied for financial deregulation and also want corporate welfare to make social assets even more commercially attractive. Politicians from both major parties champion a greater role for private finance in meeting social and public policy goals.
Impact washing
Social impact-washing includes extracting market returns from social assets and rebranding that as social impact, and seeking reputational reward for just doing what is acceptable on social issues.
Making a market return a prerequisite before financing social assets is no different to investing in, say, utilities, technology, or pharma. These sectors have an impact on our lives. Yet, we would look askance at an asset manager claiming it was ‘investing for good’ by investing in those sectors.
Financial institutions are not charities. They exist to make returns for investors and shareholders. The difference with social impact-washing is that they can obtain a double benefit: extracting value to generate market returns (sometimes underwritten by corporate welfare), and obtaining a marketing advantage for doing so.
Some might say: 'so what if we use private finance to tackle social harms as long as the finance is provided?' But, return-prioritising private finance expects to generate a return above the risk-free rate (usually taken to mean gilts, the cost of government borrowing).
