There is a lot of confusion surrounding the terms “impact investing” and “ESG.(environmental, social, and governance)” What is the difference between the two?
Impact investing is a type of investment that seeks to create positive social or environmental impact alongside financial returns. On the other hand, ESG investing focuses on environmental, social, and governance factors when making investment decisions.
While both approaches seek to generate positive change, their underlying motivations differ.
What Is Impact Investing?
Impact investing is a type of investment that seeks to generate both financial returns and measurable social or environmental impact. Impact investments range from microfinance loans to support small businesses in developing countries to equity investments in clean energy companies.
The global impact investing market is estimated to be worth $2.3 trillion. It is increasing as more investors seek opportunities to invest in companies that positively impact the world.
While impact investing still represents a small portion of the overall investment market, it has received increased attention in recent years as investors seek ways to align their values with their investment portfolios.
Most impact investment funds operate through closed-end PE and VC funds, with debt funds becoming increasingly popular in recent years.
One of the field’s challenges is quantifying impact since investors often track outcomes with different metrics depending on their specific goals, and definitions vary.
This event page is a great place to start if you want to learn more about impact investing.
What is ESG?
ESG refers to a framework or set of criteria that helps to evaluate a company’s environmental, social, and governance practices.
ESG has become an increasingly critical consideration for investors, as it can provide insight into a company’s long-term sustainability and performance.
There is no one-size-fits-all approach to ESG investing. However, by considering these factors, investors can better understand the risks and opportunities associated with a company.
The Difference Between Impact Investing and ESG
Sustainable investment has become synonymous with ESG in recent years, but ESG is a framework for evaluating companies, not a standalone strategy.
ESG factors are part of an investment assessment process, while impact investing is about what type of investments a manager targets.
ESG is an approach to identifying non-financial risks that may materially impact an asset’s value. In contrast, impact investing seeks to positively impact the environment and society through the investments a fund manager buys.
Which Should You Consider?
The next question is which is better for you, impact investing or ESG investing. They are both valuable instruments that investors can use to create positive change.
Impact investing might appeal more to investors seeking transparency about how their capital contributes to a particular cause than ESG.
Impact investing might appeal more to investors seeking transparency about how their capital contributes to a particular cause.
When it comes to investing, choosing a strategy that aligns with your values is essential. Impact investing and ESG investing can help you realize your financial goals while benefiting society and the environment.