Sustainble investing vs impact investing

The term impact investing is becoming mainstream, but the term “impact” is often applied in a very broad sense. Here we try to clarify what responsible and sustainable investing means in a comparison with impact investing.

Responsible and sustainable investing

Responsible investing as it is used by financial institutions uses an “ESG” framework. E for Environmental, S for Social and G for Governance. An ESG framework can be integrated in the risk-return analysis of investment opportunities as well as in the monitoring of a specific stock or portfolio. Drawing from a wealth of data, gathered from company disclosures, government databases and other sources, it empowers investment professionals and their clients to examine how companies are managing risks and opportunities in three key areas (and examples of questions):

Environmental:  What are the environmental effects of the company’s production? Is it managing carbon emissions? To what extent is it meeting environmental regulations?

Social: Does the company respect human rights and promote health and safety through its entire supply-chain? Is leadership promoting diversity? Have their been any conflicts with unions?

Governance: Are company leaders appropriately qualified for the role, and are they communicating a coherent strategic vision? Are their compensation packages appropriately aligned with performance? Is the C-suite communicating effectively, and transparently, with shareholders?

An ESG framework is a valuable tool that can be used to evaluate how certain behaviours positively affect a company’s performance, and subsequently drive investing decisions. It is not, however, a strategy in and of itself.

In Sweden, funds that want to promote their ESG work can declare their implementation of ESG at Hållbarhetsprofilen, This tool that has been developed by the sector to explain to consumers and the public how a fund integrates sustainability aspect in their management of assets. This standardised approach allows users to compare funds.

 

Impact Investing

Impact investing first look at the social or environmental change that a company is addressing. While solving a societal issue, some impact investors wish to see a strong financial return as well. Other impact investors may accept a lower financial return, if the social returns are high.

An important distinction between impact investing and “responsible investing” – they way we practice it at Impact Invest – is that impact investing will have a specific underserved group in mind as users, clients and beneficiaries. The question ‘Who benefits from this investment?” is key.

An example: We get many proposals for companies that have new healthcare solutions. This can potentially have very positive social impact. But when a healthcare solution is proposed for the entire population, mainstream capital and public funding can probably fund this. If the company argue that their solution is targeting a neglected or underserved group of people, then this would be considered impact investing.

Another example is renewable energy. When a company producing solar or wind energy can show that it benefits low-income communities or enable regional growth in rural areas, this could deliver both environmental and positive social effects.

Another characteristic of impact investing is that these investors dares to take more risk than mainstream investors. Without taking risk, the change needed to the country’s and world’s most pressing problems will be slow. Many angel investors who wish to see entrepreneurs and start-ups to succeed may therefore in practice also be impact investors, depending on what they invest in.

The ESG framework naturally goes hand in hand with impact investing as well. Our view is that all investments should adhere to the principles of responsible investing. On top of that, some investments are needed to pilot and scale new solutions. Impact investing can be seen as the brave little sister to the big responsible brother.

Welcome to join our community of investors that come together to learn more about how to combine purpose with capital.

 


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