By Joe Dharampal-Hornby
The need has never been greater to mobilise more private sector capital, at scale, to address social and environmental challenges. Within the environmental, social and governance (ESG) movement, impact investing has emerged as a leading solution.
Despite ESG’s familiarity, it means different things to different people, and can often include approaches that seek to mitigate harm rather than creating impact. Impact investing, by contrast, requires investment to be made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
The growing climate crisis, public concern around social injustice and regulatory pressure has led to a boom in the impact investing market. In 2020, it was worth $2.3 trillion globally, having grown rapidly in the UK and internationally across the last decade.
The Labour Party should embrace this momentum, which can enhance its economic credibility with the public; support its policy goals once in government; and enable the UK to lead the world in this exciting new frontier.
Labour’s ability to work with forward-thinking businesses and investors will influence the extent of transformative change it can deliver, from tackling climate change to boosting incomes and productivity. However, such an embrace should be accompanied by a clear plan to strengthen the foundations of the impact investing market.
Increasing numbers of investors and businesses are seeking to develop and articulate environmental and social purpose, but current standards are not consistent and are insufficient to build trust. It should no longer be acceptable for asset managers to advertise investment products as “ESG” or “green” or “sustainable” without rigorous and transparent impact measurement and reporting. Likewise, companies should not be allowed to make vague and unverifiable claims about their positive external impact. Such labelling not only harms confidence in the market, but increasing numbers of lawyers warn that green-washing risks becoming the next mis-selling scandal.
The next Labour government should continue the UK’s development of impact measurement, impact reporting and product labelling, with an absolute commitment to increasing the amount of investment dedicated to positive social impact alongside environmental. The UK should work collaboratively with partners in the EU, US, East Asia and elsewhere as forward-thinking investors and businesses strive towards global harmonisation of impact standards.
Pension schemes are at the forefront of the consumer shift towards impact investing. Savers – and thus voters – increasingly want their savings to contribute to building a greener and fairer world for their retirement and the benefit of future generations. Many pension trustees, however, fear that allowing social and environmental preferences to influence investment decisions might breach their fiduciary duty obligations.
While understandable, this concern must be overcome. Pension funds’ duty is to their members – and this includes investing in a better future as well as delivering a financial return. While welcoming the progress made in recent years, by both market and policy actors, Labour should consider further guidance to ensure that pension trustees are in no doubt that impact investing is compatible with their fiduciary duty. Additional resource to improve the skills of councils could also enable a greater proportion of local authority pension scheme investments targeted at boosting economic prosperity locally.
The scale of challenges – from climate to economic – will require a bold and transformative Labour government working collaboratively with progressive minds in the private sector. Proactive engagement with the impact investing market can enable it to grow sustainably, allowing individual savers, investors, and businesses to contribute to building a greener, fairer, and more prosperous Britain.
Joe Dharampal-Hornby is the Public Affairs Manager at the Impact Investing Institute and a Labour Party candidate in the 2022 local elections in Lambeth