One third of impact-labelled funds fulfil G7 taskforce recommendations

Just 63 of 185 impact-labelled funds pursue impact objectives and report on progress, Hamburg University researchers have found.

Just one-third of impact funds actually pursue and report on impact objectives, according to a new study by researchers at the University of Hamburg.

The researchers – Lisa Scheitza, Timo Busch, and Johannes Metzler – identified 185 funds that carried an impact label and interpreted impact as non-financial, using data from Refinitiv. Just one-third met the definition of an impact fund developed by Busch and promoted by the G7 impact taskforce. To meet that standard, a fund should seek to solve a social or environmental problem, employ a comprehensive set of investment strategies geared towards achieving and measuring impact, and report on real world impact.

While there were more public than private market funds in the overall sample, a higher proportion of private funds met the mark, with 69 percent meeting impact definitions.

Fabienne Michaux, director at the UN DP’s SDG Impact project, said it was easier for private market funds to pursue impact objectives as they tended to be smaller than their public counterparts, investing in smaller businesses at earlier stages of development. They may also be a more significant shareholder in investee companies, with more ability to engage as well as assist in capacity-building.

Of the funds that carried an SFDR classification, 37 percent of Article 9 funds met the requirements, while just 16 percent of Article 8 funds qualified. The researchers said: “While many practitioners refer to Article 9 products as impact investments, practical evidence shows that most funds do not fulfil the requirement to generate any impact.”

Speaking about the results as a whole, the researchers concluded: “Asset managers appear to have a divergent understanding of what constitutes (real) impact investment. Consequently, the term is used in connection with a heterogenous mix of asset classes and investment strategies. In several cases, one may speculate that former ESG funds have simply been rebranded as impact funds in order to gain exposure to a new market and to attract capital.”

Michaux agreed that there was an issue with definitions in the market. “There are a lot of different terms and they mean different things to different people,” she said. “The conflation of ESG financial risk management with sustainability/impact is also problematic. The jargon and productisation/market fragmentation is confusing and makes it hard for people to differentiate.”

She added that public markets investors need to acknowledge the limitations of ESG data and ratings that are being used to inform decision-making and recommended a “more holistic approach” to investment, focusing on the rate of change or transition from the baseline to desired targets.

“More of a focus on how enterprises are integrating sustainability, [their] contribution to sustainability outcomes and the SDGs into their core purpose is needed,” she said.