Is ESG Investing the Same as Impact Investing?
If you thought the answer was ‘yes’ then think again. Read on to learn more about the differences between these two investing tactics.
Do you want your investments to align with your values? Not sure where to start?
You’re not the only one! As awareness and anxiety over climate change, human rights, and other social issues increases, financial products are increasingly called upon as drivers of change. According to a 2021 report from Morgan Stanley, 99% of millennials are interested in sustainable investing.
Unfortunately, it may not be immediately clear how to green your portfolio.
The first step we’ll take is to understand the difference between ESG investing and impact investing: two frameworks that may sound the same but actually have very different outcomes.
Let’s dive in!
What is ESG Investing?
ESG investing is an investment strategy that evaluates companies based on environmental, social, and governance risk factors, alongside traditional financial metrics.
Agencies create ESG ratings, which are used by asset managers and investment firms to decide what gets included in an ESG Fund. Popular agencies are Morningstar Sustainalytics, Moody’s ESG (formerly Vigeo-Eiris), Refinitiv (now owned by LSEG; formerly Asset4), S&P Global (formerly RobecoSAM), and MSCI.
Some examples of factors that go into ESG ratings:
Environmental factors: carbon emissions, pollution, or climate change policies
Social factors: human rights, workplace policies, or employee compensation
Governance factors: financial transparency, executive compensation, or the board of directors
ESG ratings are supposed to help you assess a company’s long-term financial viability compared to its peers.
Diverging ESG Ratings
It’s true that all ESG ratings are based on publicly available data or corporate disclosures. However, these agencies don’t follow a standardized method for creating their ratings.
As a result, they can disagree about how risky a company’s ESG profile is. For example, MSCI rates Amazon as average for ESG performance (compared to similar companies), while Refinitiv rates Amazon above average. Changes in the scope, weight, and type of measurement used lead to these variations in agency ratings.
What is Impact Investing?
Impact investing seeks to create a positive social or environmental impact, in addition to a financial return.
Impact investing currently faces many of the same challenges as ESG investing. These include how we define and measure the word “impact,” over which there’s currently no regulatory oversight in the US. As the market grows, the more we’ll need to standardize what “impact” means, so that it doesn’t fall under similar scrutiny ESG investing faces.
Here are the four core characteristics of impact investing — identified by the GIIN to provide investors with clarity.
Intentionality: Impact investors aim to solve complex problems to create positive environmental or social outcomes.
Evidence-based decision-making: To effectively create environmental or social benefits, investments need to be rooted in an evidence-based need.
Managing performance of investment: There needs to be effective management regarding risk disclosure and impact reporting.
Advancement of the impact investment industry: This includes sharing lessons learned, using industry-standard language and conventions, and retroactively evaluating impact management practices.
How can Institutions Improve Sustainable Investing?
It depends on how you define ‘sustainable’
Important note: ESG investing is not the same as impact investing. ESG funds may include stakes in oil and gas companies. For example, iShares ESG Screened S&P Mid-Cap ETF contains 12 oil and gas companies in its holdings. What, then, should we do about ESG?
Better regulation
While the SEC has yet to develop any new regulations, it seems like increased oversight of ESG is on the horizon.
In response to growing demand for ESG, the Securities and Exchange Commission (SEC) proposed that public companies report climate-related risk and disclose GHG emissions. If the proposal goes into effect, disclosures on climate risk and emissions data will become more standardized and reliable. As a result, it’ll be easier for investors and consumers to compare company progress over time.
In the meantime, make sure you thoroughly investigate the holdings of your ESG funds to make sure there isn’t any greenwashing!
Using metrics that focus on climate impact, not financial risk
As more people and governing bodies push for transparency, we’ll be able to see metrics that show us true environmental and social impact.
It’s already starting: GreenPortfolio’s climate-first ratings, rooted in emissions data and other measurable climate indicators, help retail investors like you and me determine what their money’s funding: fossil fuels or climate solutions.
Align Your Investments with Your Values
ESG is a starting place for understanding an organization’s environmental, social, and governance practices. Impact investing helps you create measurable, positive social or environmental change. Both lack stringent oversight, so it’s important to do your due diligence to ensure that any investment you look at isn’t greenwashing or impact washing.
Now, more and more people want their money to make a positive impact. The demand has sparked climate tech entrepreneurs to create crowdinvesting platforms like Raise Green, which has made impact investing more accessible to the average investor.
GreenPortfolio makes the process easier as your one-stop shop for climate-friendly financial decisions! Link up your accounts, get your climate impact scorecard, avoid funding fossil fuel projects, and find greener alternatives. The platform makes it easy to learn, plan, and act. There’s also a free guide with tips to sustainable investing and banking.
Your money can be your most valuable tool to fight climate change — if you know where to put it. It’s time to finance a future you believe in. Sign up today!
GreenPortfolio is your guide for climate-friendly banking and investing. Discover your money’s climate impact and make a change — whether you’re getting your first bank account or you’re a seasoned investor.
Please Note: This article for informational purposes only and not financial advice. Opinions expressed here are not those of any bank, credit card issuer, or financial institution. Please complete your own due diligence before making any financial decisions.