Money talks, and it talks in ways that can fundamentally change the world. That’s the premise behind impact and ESG investing at least. Both of theses models are built around the premise that investors have a conscious responsibility to make sure that their investments are having a positive impact on the world around them, but these two terms are too often conflated. Each is distinct, and those distinctions are substantive. It’s worth understanding the difference if you want your investments to do good.
Impact investing has a broader purview than ESG investing, and that provides investors with a lot of leverage in pursuing their interests. Impact investments involve organizations that are directly involved in pursuing positive environmental or social change. An impact investment could take the form of a non-profit that’s dedicated to enacting social programs for low income neighborhoods or a research laboratory trying to counteract the effects of climate change. That doesn’t mean that impact investments are wholly philanthropic in nature. These types of investments are focused on the dual purpose of achieving a positive impact while also delivering a strong return on investment. While these principles are far from mutually exclusive, it can be difficult to find an investment opportunity that delivers on both.
ESG stands for the “environmental, social, and governmental” impacts of an investment. Unlike with impact investment, the greater good isn’t the primary focus of an ESG investment. ESG investments are designed to deliver profits first and foremost, but the impact on the world and surrounding communities are treated as an important consideration. But there are plenty of reasons to pursue an ESG investment or at least to consider the intersections when weighing your next investment. As millennials demand more accountability and a greater connection of values with the companies they do business with, maintaining a high ESG score can be a critical factor in a company’s long term success.
ESG and impact investments are going to become increasingly important. As consumers demand more from their businesses – and as the world propels more quickly towards a climate emergency – these factors will become a critical aspect in an investment’s value. Which option you pursue comes down to personal preference, but any investments should be carefully evaluated from a wide range of angles rather than just through their potential positive impact.