Given the political controversy around environmental, social and governance investing, you’ve probably heard of ESG criteria. But there’s another subset of sustainable or values-based investing you might be less familiar with: impact investing.
A key difference between the two is that ESG criteria act as a framework for assessing a company’s risks from non-financial material items – like an insurer with a lot of coastal customers at risk from a rising sea level – while impact investing is more positive.
What Is Impact Investing?
Impact investing is concerned with outcomes; in other words, it targets companies making specific impacts in communities, such as increasing the number of people with access to banking in historically underserved areas.
“At its heart, ESG is a risk mitigation screen, designed to determine how a company’s performance on social, environmental and governance factors might create vulnerabilities related to its supply chain, workforce or brand that will negatively affect its market performance,” says Jasper van Brakel, CEO of RSF Social Finance. “Impact investing aims to create positive effects on one or more of those dimensions while earning a meaningful return.”
The Brainy Insights, a market research company, estimates that the size of the global impact investing market will rise to $7.8 trillion in 2033 from $3 trillion in 2023.
“The impact investing industry continues to become more and more integrated into investment portfolios and mainstream finance as a way to meet the desires of investors to do good while doing well,” says Laura Skiles, director of impact for community finance solutions with U.S. Bancorp (ticker: USB). “Impact investing data continues to show that investments focused on social and environmental issues provide strong and growing returns as well as measurable positive outcomes.”
And in an election year where environmental and social issues will play a prominent role in the presidential debate, now may be a good time to consider how your investment dollars can make an impact in areas you feel strongly about.
