Impact Investing is Much More Than ESG Metrics

ESG (Environmental, Social, Governance) has become a big part of the lexicon in the world of investing.

In fact, assets under the category ESG are poised to reach $41 trillion by the end of this year, according to Bloomberg Intelligence estimates. (https://bloom.bg/3ODgGtL)

However, there is some confusion when it comes to ESG.  ESG is the term given to a variety of baseline metrics that attempt to measure the environmental, social and governance activities of companies.

Where the confusion comes in is that ESG is often used interchangeably with the term impact investing.

ESG and impact investing are certainly related but there is a different level of commitment and activity between a company who simply uses ESG as a measurement tool and a company that is actively doing socio-cultural and/or environmental impact work.

Impact investing is actually the evolution of ESG.

Impact investors want to know what a company’s total impact on society is.  True impact companies add value to society in multiple ways, and work for the benefit of all stakeholders – customers, employees, shareholders and communities.

Impact investors are interested in a given company’s true cost of doing business, which considers the societal and environmental impact of a company’s operations.  It includes negative impacts such as air and water pollution, excessive carbon dioxide output, unfair or illegal labor practices, safety issues, etc.

That said, it’s also important to stress that along with positive social/environmental impact, impact investing requires a strong financial return for investors.  By definition, impact investing is an investing approach that intentionally seeks to produce both positive social and environmental impact and a competitive financial return.  It’s a level beyond the use of basic ESG metrics.

Warren Buffett once said, “Good profits simply are not inconsistent with good behavior.”

He was right.  It turns out doing good is also good business.

And that’s what impact investing is all about.