So, private finance is more costly than government financing. Some of the returns we observed during the research were eye-watering. We found examples of asset managers claiming to generate returns of between 8 per cent to 13 per cent investing in ‘social’ and student housing. The state could fund affordable housing more cheaply.
The same practices are evident in other areas such as the provision of social care and specialist education facilities. Relying more on costly private finance ultimately pushes up the costs for people living in that housing or for local authorities who have to fill huge funding gaps.
Using private finance to keep costs off the state ‘balance sheet’ is a financial conjuring trick to conceal a false economy, a new private finance initiative.
Should finance that extracts market returns due to the state cutting the funding of basic services really be classified as social impact or sustainable? Yet, the FCA’s sustainable investment label would allow exactly that.
FCA guidance references a hypothetical investment fund that makes profits from properties used by local authorities to house homeless people. This fund would be allowed to use the sustainability impact label.
Insurers might claim they are investing for a purpose when they invest in levelling up. But, financialisation does not just push up the cost of tackling public policy goals, it contributes to inequality as insurers, shareholders, and investors obtain returns extracted from deprived communities.
The current approach to ESG finance generally, and the FCA labelling regime, allows financial institutions to gain a reputational advantage for just doing what society expects on social goals.
For example, they may restrict their investments to companies that comply with acceptable standards on human rights, fair wages, and working conditions in supply chains.
That is welcome. But special recognition should be reserved for investing in companies that, for example, have top quartile performance on social issues such as paying fair wages, ethnicity and gender pay gaps, diversity and inclusion in the workplace, supply chain behaviours, and human rights.
By way of analogy, with the honours system, ordinary citizens receive an OBE only if they do something special, not for just doing what society expects. Why should financial institutions be held to lower standards?
The new report proposes tests to distinguish between finance that prioritises positive social impact, sustainable finance that makes an impact while making returns, socially harmful finance, and impact washing.
To qualify as true social impact, we argue that investors should be willing to accept a below market return, and not expect corporate welfare. Investment should follow the do no harm principle and drive the highest standards of corporate behaviour.
