Every day confronts us with pictures and information highlighting the dramatic changes and problems that our world is facing. Climate change, and scarce resources and drinking water supply are just the beginning of a whole series of challenges. We cannot choose simply to brush aside these concerns, which could substantially change our own lives as well as those of the coming generations. Impact investing means engaging with businesses that demonstrate a clear intention to tackle these issues and contribute to change.
What is impact investing?
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Impact investing is an investment made with the intention of generating a positive social and/or environmental impact alongside financial returns. |
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It exists across a diverse range of asset classes and geographies. |
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Underlying investment candidates should demonstrate a clear “intentionality” within their business model. |
What are the main differences between impact investing and ESG?
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ESG investing aims to create superior risk-adjusted returns by analysing a company’s environmental, social and governance factors alongside financial analysis. |
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The basis for this is that non-financial issues often result in financial consequences, whether good or bad. |
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Creating a more complete company profile helps investors to judge where a business’s vulnerabilities and opportunities lie. |
- Although ESG factors are important in impact investing (much as fundamentals and valuations are), it is not the ESG profile that drives investment decisions. ESG is typically concerned with a business’s operations (such as employee welfare, supply-chain transparency and the structure of the board), whereas impact investing is concerned with a company’s output. Does the company generate revenue from products/services which help to address the world’s environmental and social challenges?
- A high ESG score can exist in almost any sector. An oil exploration company with rigorous safety mechanisms, robust maintenance capex and strong employee welfare, is less likely to experience oil spills, accidents and the ensuing fines and reparations (not to mention environmental damage). It would justifiably be ranked “best in class” from an ESG perspective and is likely to be a superior investment opportunity to its peers, due to the lower risks (and therefore higher certainty in forecasts). However it would be very difficult to define this business as a “positive impact” company as, regardless of its strong ESG credentials, its revenue is derived from the extraction of fossil fuels.