What are the main differences between ESG and Impact investments?
There is a lot of noise about ESG and Impact investments these days. In this short blog we look at the key differences between these two investment criteria.
ESG investments consider environmental, social and corporate governance criteria in determining investment decisions. ESG investments largely focus on internal factors of an organisation, e.g. what is the organisation doing about recycling waste, gender equality, workforce diversity etc.
Impact investments consider the products and services of an organisation and the value it brings towards creating a greener and sustainable future. E.g. solar panels, wind turbines, electric vehicles etc. Thus, impact investment focus on external factors and impact of the organisation’s activities.
Investors mainly looking to use ESG to balance out their portfolio to reduce risk of exposure to ESG related factors. The main purpose is still to seek as high a return as possible.
With impact investments, investors are mainly looking at new opportunities that bring benefit to environment and society. The main purpose is to both seek returns and positive impact to wider society.
Generally, ESG investors can have short- or medium-term investment horizon with focus on quarterly returns and reporting.
While investors in impact investments tend have a long-term worldview of the positive impact they want to see on environment and society
There are global investment opportunities with ESG investments across all sectors, mainly in listed organisations, which offers greater liquidity. For non-listed entities, specialist investment structures like private equity, venture capital, hedge funds may be used. Care does need to taken to avoid “greenwashing”.
For impact investments, there are global investment opportunities across sectors like renewable energy, healthcare, education & food technology, which can include both listed and non-listed organisations. Some impact investments funds are listed, but mainly need to consider specialist investment structures like collective investment schemes, private equity, venture capital.
Earliest example of ESG type investments include in the 1960s when International Brotherhood of Electrical Workers in US, invested their capital in developing affordable housing projects, and the United Mine Workers invested in health facilities.
While some form of impact investment has been around for decades, however the publication of the 17 UN Sustainable Development Goals in 2015, has really driven the popularity of impact investments.