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Impact Investment and ESG - What’s The Difference?

Impact investment, Environmental and Social Governance (ESG) and Socially Responsible Investment (SRI) are all terms used interchangeably to convey a general concept of investors becoming more socially and environmentally responsible in their business strategies. While these phrases are often lumped into one category for measurement purposes and do have overlapping characteristics, there are distinct differences in these approaches to responsible investment. Impact investing may be thought of as taking social and environmental consciousness to the next level; the ultimate in altruistic investment perhaps.

How is Impact Investment Defined?

The Global Impact Investing Network (GIIN) defines impact investments as those made with the intention to generate positive, measurable, social and environmental impact alongside a financial return.

Impact investing usually involves investment into a specific project or program that has a tangible, positive outcome and benefits society as a whole. This could involve investing into a business or organization, either profit or non-profit, that is seeking to address a pressing social or environmental issue; lack of affordable housing, reducing emissions through clean energy initiatives or making healthcare more accessible in developing countries are some of the many things that can appeal to an impact investor.

Depending on the investors’ particular goals, investments may go into a wide range of projects across both developed and emerging markets with the spectrum of financial return ranging from below-market to outperforming expectations.

How does Impact Investment Differ from ESG or SRI investment?

Impact investment is all about the ‘outcome’ rather than mitigating the causes of harm. Where ESG and SRI demonstrate a level of responsibility they remain primarily concerned with financial return - impact investing challenges the theory that you can’t have both.

Just Coded demonstrates the three different investment approaches superbly…

ESG investments use a set of criteria across environmental, social and governance factors to determine which areas may have an impact on the investment and come up with an ESG score. This score is used to complement traditional financial analyses in the decision-making process, so although there is a nod to social conscience, conclusive financial performance remains the primary objective.

SRI investment goes a little further in that investment propositions are screened and filtered so that anything that conflicts with a deeply-held personal value or preference is dismissed. This can obviously look very different to different investors who will base their decisions on their own religious or political motives, filtering out investments into companies that violate human rights or engage in destructive environmental practices as they see fit. SRI investors may use ESG factors in the screening process, however they still essentially want to turn a profit without surrendering principles.

There’s no denying that impact investing can be more complex to implement and somewhat riskier, but it allows investors to fund projects that align with their personal values even if the returns are lesser and take longer to achieve. Millennial investors and younger-generation family office leaders are driving the boom in impact investing, with the common belief that with all the good intentions of ESG and SRI, these approaches are still not nearly enough to make a difference in the world.

Is Impact Investing a Tenable Opportunity?

According to the Responsible Investment Association (RIA) Canada, the market for impact investing is increasing at a rapid pace in Canada, growing at a rate of 81% between 2015-2017 alone and outpacing the growth rate of all responsible investment which was 41.6% for the same period.

Globally the market is estimated to grow by a further 17.6% CAGR between 2020 and 2027, totalling US $791bn worldwide. The US and Canada are paving the way for others to follow, seeking investments that will have a specific impact across their entire portfolio as signified by the percentage of impact assets under management that are now in the public equity domain.

Although impact investing may once have been viewed as a burden on investors and corporations alike, a box-ticking exercise that only served to reduce profits; that stance no longer rings true. The majority of impact investors report performance of assets meeting or exceeding expectations.

What’s Next for Impact Investment?

Impact investing is becoming mainstream and we expect the greening of portfolios to continue at pace.

It would be unrealistic to think that impact investing will be solely responsible for solving the world’s problems however, many of which heightened during the pandemic.

Impact investment is a fragmented area that requires a more consultative approach than typical investments and it will need some stitching together of different segments of society both domestically and on a global scale to maximize the effect. It will also require a concerted effort to create global standards and achieve complete transparency in measuring, monitoring and reporting on impact; in this respect investors can ensure funds are going to make a genuine impact and not just to companies that do a better job than most but realistically are just the best of a bad bunch.

Despite any challenges, more and more investors are recognizing that the lofty aspiration of leaving the world a better place than when you entered it, is both within reach and extremely profitable.

Reach out to PCG for assistance in achieving your impact investment goals.

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