However, market reviews conducted by the University of Hamburg and 2DII show that misleading impact claims are commonplace among some financial market participants.[1] Furthermore, mystery shopping visits conducted by 2DII in 9 EU countries reveal that only 6% of advisers were knowledgeable and transparent about the impact potential of their recommended products.[2] These results suggest that the current sustainable finance regulatory framework is not fit to effectively protect consumers from impact washing and accommodate those consumers who want to invest in financial products with high impact potential.
The first IPAF pilot test focused on self-labelled sustainable venture capital funds, private equity/debt funds, infrastructure funds, crowdfunding platforms (i.e., primary market investments), and saving accounts available for retail and qualified investors in Germany, France, Switzerland, Spain, Sweden, or Ireland. The analysis revealed that the offering of financial products in our scope with relatively high impact potential is currently low yet existent (74 financial products with an IPAF rating of E or higher). However, the main objective of this exercise was to test the IPAF and its applicability. This report demonstrates that the IPAF can be used to qualitatively distinguish, based on scientific evidence, the impact potential of different financial products within and across product categories. This feature makes the IPAF a unique and valuable open-source tool to assess the impact potential or “additionality” of financial products, which can be used by private investors, product manufacturers and distributors, standard setters, or supervisory authorities.[3]
IPAF rating distribution
Source. 2DII (2023).
Our pilot test also demonstrated that the IPAF could be applied to assess the impact potential of a much larger amount of self-labelled “impact products” which are available for professional investors, such as private equity/debt funds or infrastructure funds. For instance, the IPAF product scores could be used to maximize the impact potential of a pension fund portfolio by reallocating existing primary market investments (e.g., PE and infrastructure funds) towards options with the highest impact potential while respecting the financial constraints of the investment mandate. Yet, before an extension of the IPAF application to a larger product universe, 2DII plans to work on a revision of the framework based on our learnings and a series of expert discussions. This revision will address questions about impact success factors, assessment criteria/questions, scoring thresholds, and potential weights, as well as the “minimum criteria” for financial products to be suitable for impact-oriented investors.
Finally, our pilot test also revealed some structural limitations, including a lack of public impact databases or ratings that would allow us to easily identify financial products that claim to generate real-world impact and a lack of relevant and structured impact-related disclosures. Therefore, we recommend integrating the concept of “investor impact”/“impact generation” in financial product disclosure frameworks such as SFDR. A new SFDR categorisation system should integrate “investor impact”/“impact generation” horizontally across all categories where financial products are seeking real-world impact and vertically with a separate “impact” category for financial products with high impact potential, as recommended by FCA.[4] More research is needed about new qualitative and quantitative indicators that could be used as proxies to measure the impact potential of financial products in a more automatized way. The IPAF could be a first step in this direction.
About the funder:
About our funder and the project: This project is co-funded by Swiss Federal Office for the Environment (FOEN), Climate Division, 3000 Bern and by the EU LIFE Programme and it’s NGOs on the European Green Deal (NGO4GD) funding program under Grant Agreement No LIFE20 NGO4GD/FR/000026. This work reflects only the author’s view and the funder is not responsible for any use that may be made of the information it contains.
The paper is part of the Retail Investing Research Program at 2DII which is one of the largest publicly funded research projects about the supply, demand, distribution and policy side of the retail investment market in Europe.
[1] See Scheitza/Busch/Metzler, 2022, The Impact of Impact Funds – A global analysis of Funds with impact-claim and 2DII, 2023, Market review of environmental impact claims of retail investment funds in Europe [2] See 2DII, 2023, Moving the blockers of retail sustainable finance or 2DII, 2023, Assessing client sustainability preferences…lost in the maze? [3] Note that existing impact disclosure frameworks, including GIIN IRIS+ with a special focus on impact investing, are focusing on “impact alignment”/”company impact” and are therefore failing to deliver relevant information for assessing the degree of “impact generation”/”investor impact”. [4] See FCA, 2023, Sustainability Disclosure Requirements (SDR) and investment labels
