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Understanding the Difference Between ESG & Impact Investing

Increasingly, organizations and individuals are interested in putting their money where their values are. For those seeking to align financial returns with environmental, social, and governance (ESG) considerations, two prominent strategies have emerged: ESG investing and impact investing. While both approaches share a commitment to integrating non-financial factors into investment decisions, they differ in their primary objectives, methodologies, and intended outcomes.

Defining ESG Investing

ESG investing involves considering environmental, social, and governance criteria against traditional financial metrics when evaluating potential investments. The goal is simple: identify companies that demonstrate strong ESG practices and exhibit sustainable business models.

ESG includes a wide range of considerations:

  • Environmental: The company’s carbon footprint, energy efficiency, waste management, and resource usage are all factors in assessing its impact on the environment. 
  • Social: How a company interacts with its employees, suppliers, customers, and communities all play a role here. This can include labor practices, diversity and inclusion initiatives, human rights policies, and community engagement efforts.
  • Governance: The structure and oversight of a company’s management and board of directors are factors for consideration. Main areas of focus include executive compensation, board diversity, transparency, and ethical business practices.

There are a few different screening methods that ESG investors generally use. Negative screening excludes companies with poor ESG practices, positive screening favors companies with strong ESG performance, and ESG integration which refers to evaluating the degree to which organizations have incorporated ESG factors into traditional financial analysis.

Exploring Impact Investing

Impact investing takes sustainable investing a step further by explicitly seeking investments that generate measurable, positive, social, or environmental impact along with financial returns. This style of investing prioritizes achieving specific social or environmental outcomes. These outcomes can vary greatly depending on the investor’s priorities but may include:

  • Environmental: Investing in renewable energy projects, clean technology companies, sustainable agriculture, or conservation initiatives to mitigate climate change and preserve natural resources.
  • Social: Targeting investments in affordable housing, healthcare, education, or community development projects to address social inequality, improve quality of life, and promote economic empowerment.
  • Both: Pursuing investments that deliver dual benefits by addressing environmental and social challenges, such as sustainable infrastructure development or access to clean water.

Impact investors typically employ a range of strategies, including focusing on specific impact themes or sectors, direct investments in social enterprises or nonprofits, and investments through dedicated impact funds or venture capital firms.

Key Differences Between ESG and Impact Investing

While both ESG and impact investing share a common goal of integrating sustainability considerations into investment decisions, they have several important differences to be aware of.

  • Objectives: ESG investing primarily aims to manage risks, enhance long-term financial performance, and align investments with stakeholders’ values and preferences. Impact investing, on the other hand, prioritizes the achievement of specific social or environmental outcomes alongside financial returns.
  • Focus: ESG investing considers a broad range of environmental, social, and governance factors when evaluating investments, with the goal of identifying companies with strong sustainability practices. Impact investing focuses on investments that generate measurable, positive impact in targeted areas, such as poverty alleviation or environmental conservation.
  • Measurement and reporting: ESG investing relies on various metrics and rating systems to assess ESG performance. Impact investing requires robust measurement and reporting to track the social or environmental impact of investments to demonstrate real, tangible outcomes. 
  • Risk and return profile: Generating financial returns are important for both ESG and impact investments. However, impact investments may carry additional risks due to the emphasis on achieving specific social or environmental outcomes. Sometimes, that leads to investors in impact funds or social enterprises being willing to accept lower financial returns in exchange for greater social or environmental impact.

Can Deposit Funds be Used for ESG or Impact Investing?

The short answer: not exactly. 

Your organization’s deposits aren’t investments, so it isn’t possible to use them to support causes the same way ESG or impact investing uses them. But, you can still take steps to ensure the funds you place in financial institutions are aligned with your organization’s values.

For example, organizations working on green energy may not be interested in placing deposits with an institution that lends money to fracking companies, and vice versa. Examining the practices of banks you work with can give you valuable insights into whether your organization is comfortable working with them. 

Ampersand created the AmpersandAlign™ program to do much of that heavy lifting for our clients. Leveraging artificial intelligence and machine learning alongside our decades of industry experience helps us place our clients’ deposits with financial institutions that align with their values. 

What’s more, we aren’t necessarily limited by the constraints of ESG or impact investing. For instance, if your company’s primary goal for your deposits is to realize a strong return, we can assemble a roster of compatible financial partners that can help get you closer to your goal. If your organization is interested in supporting institutions that give back to the community or have measurable social impacts, we can make sure your deposits are only placed with banks or credit unions that meet your requirements. 

The bottom line is that investors and depositors alike have options when it comes to realizing their financial goals and ensuring their money is supporting causes and goals that matter to them. 

Find out how your deposits can support your organization’s goals and values. Contact Ampersand to get started