As the fund markets around the world are in general very crowded places, where a lot of products with similar investment objectives are trying to gather assets from the same investor pool, fund promoters need to differentiate their products from those of their competitors to gain a competitive advantage.
This is also true in the segment of sustainability-oriented investment products. As the interest of investors rose for ESG-related products, an increasing number of funds claimed to integrate ESG credentials into their investment processes.
In some cases, the wording on which ESG credentials are exactly used and how they are integrated in the overall portfolio management process was very vague. This led to greenwashing accusations as investors witnessed that some funds claimed to be ESG-related products but didn’t deliver on the expectations of the investors. That some funds may have overstated the usage of ESG credentials can also be seen in the number of funds which get downgraded within the respective Sustainable Finance Disclosure Regulation (SFDR) classifications, especially Article 8 funds which get reclassified as Article 6 funds. Overall, it can be said that the greenwashing accusations have impacted the trust of investors into the claims of asset managers.
Since ESG has been around as a product claim in the fund industry for a while, fund promoters were looking for new claims which they can use to differentiate themselves from their competitors. The claim they found was impact investing, which is related to the 17 Sustainable Development Goals (SDGs) of the UN. Therefore, it is no surprise that impact investing has become a very popular claim in the fund industry since the environmental or social impact of an investment is even harder to measure than the general ESG performance. With regard to this, it is also no surprise that investors and market observers fear the abuse of the term impact investing and expect that a number of products will be caught doing impactwashing.
One reason for these fears can be seen in the fact that the vast majority of impact funds are investing in publicly listed securities. This means that the fund managers are normally buying a security from another investor instead of allocating their capital directly to the issuer. As a result, the impact of such an investment is somewhat limited, if evaluated by the measures of the International Finance Corporation (IFC), which is a member of the World Bank Group. This does not mean that impact investing can’t be achieved with investments in public markets, but it does mean that investments in private markets are better positioned to achieve an impact, as the investor allocates his money directly to the issuer.
To be clear, I believe that it is possible to achieve an environmental and/or social impact with a mutual fund or ETFs which invests in public markets. That said, fund promoters need to be quite clear about their goals with regard to the impact they want to achieve and how this will be measured. In other words, a fund which claims to be an impact fund should disclose the three attributes (intent, contribution and measurement) defined by the IFC, to avoid impactwashing accusations.