If you’re reading this, chances are you already know what ESG is. In fact, you might even be invested in companies that meet ESG standards. And while using ESG can help investors invest more responsibly, it is not the same as impact investing. Whereas ESG is a set of criteria, impact investing is a strategy, and not necessarily one as focused on financial gain as much as positive social and/or environmental change.
“I think what a lot of people don’t understand about ESG is it usually is really focused on looking at those environmental, social and governance factors that are going to have a material financial effect on the company,” says Kim Griffin, member engagement director at Toniic, at the recent Health + Wealth of America conference. “So it’s really still rooted in looking at the financial impacts of the company, which may or may not meet expectations of investors who want to solve the climate crisis and have more flexibility on financial risk and financial return expectations.”
Griffin often finds people think ESG is a broader framework than it actually is. Andrew Lee, managing director and head of sustainable and impact investing at UBS, continued with that thought, explaining that he thinks the terminology trips people up, but he wants investors to be more concerned with determining what their goals are with their investments and making sure their portfolio is set up to align with those intentions.
When it comes to impact investing, Lee defines it as “driving measurable positive change.” One of the key differences between ESG and impact investing is that impact investing is far more focused on the positive social/environmental outcome, whereas ESG usually warrants better financial returns. Of course, many investors are in it for the financial growth, but Griffin says that while there isn’t necessarily a trade-off for impact investors, we’ve arrived at a time where investing in the greater good can round out a diverse portfolio.
“We’re lucky that we’re at a time where the impact investing and the ESG market has matured and grown enough that you can build an entirely diverse portfolio that is aligned to impact in some way,” Griffin says.
Lee notes that there are opportunities for impact investing to deliver not only positive change, but also good financial returns.
“There are opportunities, certainly in the areas of climate, health, education and elsewhere, where the opportunity sets are so large that there are commercial solutions that can really deliver at above-market-rate returns while having that tangible positive impact. But it’s not everything,” Lee says. “There are some areas where you might have to take [a] longer time risk or perhaps the risk that the financial return won’t quite be there in order to really solve problems in certain geographies.”
For investors who want to do good while also maintaining a full portfolio, Lee says diversification is critical.
“I think there are a lot of opportunities for sustainable investors or people looking to drive impact, and it’s about being specific about that,” Lee says. “But diversification is good across full investment portfolios. So, it’s important to think about making sure there’s diversification so you’re not overly concentrated or exposed to specific risk.”
