ESG and Impact investing are becoming a hot cake in the corporate social space. A recent report by IFC suggests impact investing could total as much as $2 trillion. As a matter of fact, socially responsible investing and one of its subsets, impact investing, accounted for more than $1 out of every $4 under professional management in the U.S., according to a 2018 survey by the U.S. Forum for Sustainable and Responsible Investment. However, often times, both terms are misunderstood, hence this attempt for clarification.
ESG as a term has popularly become synonymous with sustainable investment, but ESG is a framework for evaluating companies and not a standalone investment strategy. ESG refers to a set of criteria used to evaluate a company’s environmental, social and governance risks and practices. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. For example, if a company is more profitable because it doesn’t properly dispose of toxic waste, there is a legal risk associated with this negligent behavior. (source: here)
Impact investing, on the other hand is a strategy of investing in enterprises, organizations and funds that seek to create both financial returns and measurable social and/or environmental impact. Investors who seek financial gains and impact refer to this as the “double bottom line,” mimicking an accounting term to express how both aspects need to be measured and reported.
ESG is a reactive assessment of a company’s actions and how they affect environmental, social and governance issues. Impact is about the type of investments a manager is targeting, while ESG factors are part of an investment assessment process. Further, impact investing is seeking to make a measurable positive environmental/social effect with the investments a fund manager buys while ESG is an approach to identifying non-financial risks that may have a material impact on an asset’s value.
We hope this helps to clarify both terms. Do drop a comment or question.
