In recent years, there has been a growing interest in investing with a focus on environmental, social, and governance (ESG) factors. This has led to the emergence of two distinct approaches to sustainable investing: impact investing and ESG investing.
What is ESG investing?
Environmental, social, and governance (ESG) data was introduced as a tool to guide socially responsible investors. Investors use ESG data to find companies making active efforts to limit their negative societal impact and/or deliver societal benefits.
ESG investing is a type of investment that takes into account environmental, social, and governance data when making investment decisions. ESG data can include things like a company’s carbon emissions, its labor practices, and its board diversity.
Investments with good ESG scores tend to drive stronger financial returns, while those with poor ESG scores may inhibit returns. While there is an overlay of social consciousness, the main objective of ESG valuation is financial performance. An example of an ESG investment might be buying stock in a technology company that converts one of its data centers to use renewable energy, resulting in cost benefits as well as a positive effect on the environment.
The goal of ESG investing is to reduce risk and improve returns by investing in companies that are well-managed and have a positive impact on the environment and society. ESG investing can be done through a variety of investment vehicles, including mutual funds, ETFs, and individual stocks.
What is impact investing?
Impact investing is a type of investment that seeks to achieve both financial returns and measurable social or environmental impact. Impact investors typically invest in companies or organizations that are working to solve specific social or environmental problems.
While ESG investing relies on exclusionary practices to screen out harmful investments, Impact Investing aims to bridge the altruistic principles of philanthropy with traditional investing.
Impact investing can be done through a variety of investment vehicles, including venture capital, private equity, and debt investments. Impact investments can range in size from a few thousand dollars to millions of dollars.
The idea is to generate social and/or environmental benefits while delivering a financial return – thereby providing a tool for both investors and philanthropists.
Comparison of ESG investing and impact investing
ESG investing and impact investing are both growing in popularity, but they have different goals and approaches.
Similarities:
- Both ESG investing and impact investing consider ESG factors.
- Both ESG investing and impact investing can be done through a variety of investment vehicles.
Differences:
- ESG investing is focused on reducing risk and improving returns. ESG investors believe that companies with strong ESG practices are more likely to be financially successful in the long run.
- Impact investing is focused on making a positive social or environmental impact. Impact investors are willing to accept lower financial returns in exchange for the knowledge that their investment is making a positive difference in the world.
- ESG investing can be done through a wider range of investment vehicles than impact investing. ESG investors can invest in a variety of companies, regardless of their size or industry. Impact investors, on the other hand, typically invest in smaller companies or organizations that are working to solve specific social or environmental problems.
Which is better, impact investing or ESG investing?
There is no one-size-fits-all answer to this question. The best approach for you will depend on your individual goals and risk tolerance. To understand this better, you can refer to this Spectrum of Impact Capital by Bridges Ventures.
If you are primarily interested in reducing risk and improving returns, then ESG investing may be a good option for you. However, if you are also interested in making a positive social or environmental impact, then impact investing may be a better choice.
Conclusion
ESG investing and impact investing are both growing in popularity. Each approach has its own advantages and disadvantages. Investors should carefully consider their goals and risk tolerance before choosing an approach. We hope this article helps you to understand the difference between impact investing and ESG investing. If you’d like to dive deeper, consider checking out our article: SRI vs. ESG vs. Impact Investing
