ESG vs. Impact Investing

ESG and impact investing are both terms generating a fair amount of buzz in the investing world. Despite their prevalence in industry discourse, we find there can still be confusion around the difference between the two. Indeed, they are not the same. Simply put, ESG is a framework for assessing risk and opportunities, and impact investing is an investment strategy to drive positive outcomes.

What is ESG?

Environmental, social and governance (ESG) is a framework for helping organizations assess risk and opportunities around issues that can affect a firm’s sustainability. It looks at business activities beyond financial accounting that can potentially impact an organization, and often presents as a scoring system.

Environmental Refers to stewardship of the natural environment

Social Refers to people and relationships

Governance Refers to responsible management

ESG can be risk-mitigating. For example, a firm may consider that poor governance might lead to the risk of mismanagement. Or that improper waste disposal might lead to legal risk. In investments, risk assessment involves screening out investment opportunities, such as companies with low standards of labour that risk a retention problem. Using ESG to assess risk considers what a firm stands to lose by not adhering to ESG criteria.

ESG can also present as opportunities. For example, a firm may increase diversity, equity and inclusion to bolster team performance and better reflect the consumer market. Or it may consider investing in a company driving efficiencies in an industry that is traditionally carbon heavy. Using ESG to assess opportunity considers what a firm stands to gain by incorporating ESG practices.

As a standard, most impact investing firms incorporate ESG into their assessment processes. On the other hand, not all firms practicing ESG are impact investors; in fact, ESG investing alone does not necessarily generate impact. Further, the adoption of ESG extends beyond the investment industry; any organization looking to improve sustainability can incorporate ESG into its framework. As such, many firms practicing ESG measure success based on financials first.

What is Impact Investing?

Impact investing is the practice of investing where in addition to financial returns, there is intention to generate measurable social and/or environmental impact. It is a strategy to define the types of investments an investor will make.

Impact investing measures success based on both financial and impact returns. Some investors may even prioritize social and/or environmental benefits so long as financial returns are positive. Impact investors recognize that impact and profit can be interconnected and mutually reinforcing; in this view, impact is not seen as concessionary but rather as a driver of financial performance.

There are a few impact investing principles depending on which standard is referenced, the most widely adopted being the Global Impact Investing Network’s (GIIN) definition which considers:

• Intentionality: there is intent to create positive change
• Return expectation: there is an expectation of financial return on investment alongside social and/or environmental returns
• Range of return expectation and asset classes: there is an expected rate of financial return and targeted investment types
• Impact measurement: there is attempt to measure change

Intentionality, the implicit goal to generate social and/or environmental benefits, generally aligns with one or more goals from global impact frameworks such as the UN Sustainable Development Goals or IRIS+ framework. Intentionality is also the first line of defence against impact-washing, ensuring investments seek to generate solutions rather than simply screening out companies with potentially risky practices.

Some guides to impact investing include another principle: Contribution (or additionality). This principle states that it is not enough to invest in a company creating impact or managing ESG well, but that investments should contribute to the company’s impact, either through financing their growth in the impact areas or by influencing the company to generate impact.

In summary, ESG is concerned with how the external world and the actions of a firm could impact the sustainability of the firm. It is an assessment tool used for long-term planning and building resilient organizations. Impact investing is a strategy considering how a firm can impact the world, by defining the types of investments an investor will make to generate social and/or environmental benefits alongside or as a driver of financial returns.

As a strategic investment fund with a triple bottom line mandate, InBC’s investment strategy both practices impact investing and utilizes ESG criteria in our assessment process (as well as internally in our own operations). Our approach to impact and ESG is informed by global standards and frameworks. To learn more about our investment approach, see our investment strategy overview.