The world is in a critical state right now, and growing concern for the environment is causing changes in how business is conducted. Long gone are the days when the company would churn out profits without being responsible for their impact on the environment.
Research and increasing awareness have led to a generation conscious of the importance of sustainable development and the business environment. This has brought on a lot of financial concepts that deal with sustainability and longevity.
Socially responsible investing, ethical investing, Environmental, Social, and Governance standards, investment impact are terms that now appear regularly in the media and investment brochures. In 2020, investors put in almost four times more cash in ESG investment funds than in 2019.
However, the diversity of terms described above and others like them blurs the boundaries between different investment products and strategies, confusing many investors.
Ninety-six percent of impact investment professionals consider the lack of clarity on what impact investing is a challenge. And the fact that both ESG investments and impact investing are growing so fast, in unison, might make some people differentiate between the two. Therefore, it is necessary to draw a clear distinction.
Although both impact investments and ESG investments can generate enormous financial benefits while helping to build a better world, there are some essential differences.
Understanding these differences can help investors make better investment decisions and provide transparency and clarity on the nature of the impact of a given investment.
ESG Investment is an investment approach that incorporates environmental, social, and governance factors into decision-making throughout the investment cycle. Using a variety of methods, the rapidly growing number of funds now does just that. There are ESG funds that are risk mitigators, and others are opportunity seekers.
Risk mitigators use ESG insights to assess and manage potential risks while remaining cautious while opportunity seekers seek investment opportunities that support environmental, social, or governance.
There is growing evidence that ESG's opportunity-seeking approach, in particular, leads to investments in more successful businesses in the long run.
Companies that envision a net-zero future are actively working towards a low-carbon footprint and reducing their energy costs. Companies that are fully integrating their workplaces and helping employees are developing a workforce that will be effective in the long run.
And companies whose boards have genuinely independent and diverse voices, especially on ethnic and gender grounds, will make better risk management decisions and allocate capital more effectively. Now, more than ever, the market has reason to believe that doing the right thing can pay off.
According to the Global Impact Investing Network,
is defined as an investment made to create a measurable, positive social and environmental impact with the acquisition. Impact investors incorporate environmental, social, and governance factors into their investment decision.