What do we mean when we talk about impact? In a time where social and environmental awareness is gaining momentum, the concept of “impact” has become omnipresent. Yet, amidst the buzz, not every proclamation of impact unfolds into tangible, transformative actions. This article delves into the keys to identifying and combating impact washing, a deceptive practice that threatens the authenticity of impact investing.
What is “Impact Washing”?
Consumers, investors, and governments increasingly demand that companies play an active role and contribute to overcoming various challenges affecting society and the planet. Generations like millennials or Gen Z perceive climate change as one of their major concerns, with 7 out of 10 stating that they try to minimize their impact on the environment, according to a recent Deloitte study. Faced with these expectations, some companies choose to project an exaggerated or even false image, claiming social and environmental improvements without truly committing to substantial changes.
This practice is known as impact washing and poses a threat to the impact economy – one that seeks social, environmental, and financial profitability simultaneously. One of the main consequences of this deceptive action is the redirection of financial resources away from projects earnestly striving to make a meaningful impact, thereby diluting the efficacy of impact investment. Consequently, identifying and thwarting such practices have emerged as pivotal challenges for investors, consumers, and organisations aspiring to foster a genuine positive impact on society.
How to detect Impact Washing
While impact investment is growing rapidly – exceeding one trillion euros globally in 2022 with a 58% increase in funds in Spain – the false attribution of impact has also spread in marketing campaigns seeking reputation improvement to attract more clients. This practice erodes society’s trust in the role the financial sector plays in transitioning to a fairer and more sustainable world, making consumers and investors less likely to invest their money in impact projects. To counter it, we must raise alarms when encountering:
Lack of intentionality and ambiguous objectives
Real commitment to impact investment involves a clear intention to solve a specific problem and establish specific goals. If a company uses vague and generic terms to describe its impact or exploits circumstances to claim benefiting others, they may be more interested in appearance than real transformation, bringing them closer to impact washing.
Lack of measurement and evaluation
Constant measurement and evaluation are essential for the success of impact investment. If a company does not demonstrate a serious commitment to evaluating its initiatives and adapting as necessary, they may be more interested in perception than in the net positive change generated for people and the planet.
Lack of transparency
Companies committed to real impact investment are transparent about their practices and results. If an organization claims activities for the benefit of society and the environment but does not provide detailed and easily accessible reports, such as carbon emissions or social impact results, it could be a sign of impact washing.
“I believe that impact transparency is the next big step and that we will see impact accounting come into being over the next two to three years.” – Sir Ronald Cohen, Chairman of the Global Steering Group for Impact Investment, in an Impact Investor interview.
Combatting Impact Washing: Effective strategies
Education and Awareness
The first line of defense against “impact washing” is education. To strengthen impact investment, investors must become familiar with the principles and practices behind impact to identify signals that allow them to trust they are supporting initiatives with significant transformation potential or, conversely, facing cases of mere exaggeration.
Regulation
In an attempt to gain transparency and clarity on sustainable investments, the European Commission introduced the Sustainable Finance Disclosure Regulation (SFDR) in March 2021. Through this Regulation and its new Taxonomy, a classification system is established to determine whether an economic activity can be considered sustainable. However, there is some controversy about its effectiveness due to its complex implementation.
“We welcome the arrival of SFDR and the EU Taxonomy as it represents an important and necessary step to prevent ‘impact washing”. However, there is still much work to be done.” – Maite Fibla, Cofounder and Managing Partner of Ship2B Ventures, in a Corresponsables interview.
Rigorous Analysis
Before making any investment, conducting a thorough analysis is crucial. Evaluating transparency, objectives, integration into the business strategy, and a company’s measurement and evaluation systems is essential to ensure that we are indeed dealing with impactful projects. For this reason, at Ship2B Ventures, we anchor impact at every stage of the investment process, from screening to portfolio management, and our carry is tied to the impact expected by each company we invest in.
Additionality
Are we truly driving change? We should frequently ask this question when facing new impact projects. Deep and additional changes are needed to curb climate change and close the social inequality gap. As outlined in the SpainNAB report from the Taskforce de Fondos, in which we participate, additionality refers to whether the company contributes specific solutions to unaddressed social or environmental challenges.
Active Engagement
Startups are, by definition, agents of change. In their early years, they can evolve rapidly, affecting not only their organizational structure but also their business model. Therefore, as impact investors, it is crucial to accompany entrepreneurs in their day-to-day to ensure that impact remains present in their evolution as a company.
While all these strategies help reduce impact washing, impact measurement challenges, lack of standardization, and comparability between projects and funds create a space for bad practices to persist. Asset managers and owners must create an impact investment thesis where the change they want to achieve is clear. Also, it is important to anchor impact through the investment process and monitoring closely the progress of each company regarding their impact indicators.