The most significant element in the definition of impact investing is that all investments have impact.
Positive or negative, every business action has an impact.
In 2020, ESG funds attracted $53 billion in net new capital from investors, according to a Morningstar report. That’s an increase of $21 billion over the previous year. Additionally, the number of dedicated impact investing funds has increased exponentially in the past few years, increasing from $502 billion in assets under management in 2019 to $715 billion in 2020, according to the GIIN.
Impact investing: what does it mean?
The goal of impact investing is to generate financial gains while also positively addressing social or environmental issues. Impact investments can be made across a broad range of asset classes and aim to achieve measurable outcomes. In impact investing, capital and investment are used to generate revenue along with positive social and environmental outcomes.
Impact investors see themselves as engaged asset owners. For investors, impact includes a deeper accountability for all of the positive and negative outcomes.
ESG Investing: what does it mean?
ESG stands for Environmental, Social, and Governance. Investors are increasingly considering these non-financial factors as part of their analysis process to identify material risks and growth opportunities.
ESG reporting is beyond compliance – they are not mandatory (yet!), even so, companies adopt ESG reporting frameworks as a part of their yearly reporting.
Impact ESG & Sustainability Reporting frameworks
In sustainability reporting, several global reporting methodologies and NGOs are working to form standards and define materiality in order to facilitate the incorporation of these factors into the investment process, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD). Impact reporting methodologies include The UN Sustainable Development Goals (SDGs), The Impact Managment Project (IMP) among others.
Impact Investing Vs ESG investing
ESG and Impact investing both aim to invest in companies aligned with their accountability to generate profits while being accountable to society and environment. Impact investing is actively contributing to solving challenges, while ESG investments monitor their environmental and social risks.
Investors Intentions can be categorized into three types of impact:
- Acting to prevent harm – responsible investment
- Benefiting Stakeholders – sustainable investing – ESG investing
- Contributing to solutions – impact investing
Source: Impact Management Project A,B,C framework.
Q&A on Impact investing and ESG investing:
How does ESG investment work?
By analyzing the material factors of public companies, one can determine the ESG risks they face. Identifying potential risks in advance is a key element in a company’s growth and success. Risks include environmental issues such as greenhouse gas emissions, energy use, waste management, water use, etc. ; societal issues such as labor rights, supply chain management, diversity and inclusion; and government issues such as data protection, ethics, and transparency in decision making. ESG risks in industries differ from one another according to their classifications.
Is impact investing Profitable?
As with all investors, impact investors want a return on their investment.
Business Impact investors aim to generate market-rate or higher returns and screen ventures based on their empathic focus, such as Food, Agritech, Energy, Water, Health, etc.
What are the benefits of impact investing for businesses?
The concept of impact businesses refers to enterprises that actively contribute to solving societal or environmental problems while generating profits. Profits are central to your core business plan – you benefit stakeholders through your product or service, which is a core business goal.
Electricity utilities, for example, purchase clean energy storage technology from a startup, for their daily industrial use. A medical startup develops a technology that allows for the pre-detection of cancer and uses it to assist medical teams with their diagnosis.
Impact is focused on measuring outcomes. Impact adds another layer to companies’ accountability. A company’s impact is evaluated across the value chain: the positive and negative contributions that a company brings to the planet and society. This score is called: Net impact.
What is the business case for impact investing?
Investors may manage impact for the sake of creating positive change for people and the planet. They may also be driven by concerns about regulatory risk and reputational risk. Investors may believe impact is a business opportunity: unlocking commercial value. Others wish to align their capital with their personal set of values and beliefs.
The impact revolution
Globally, awareness and contribution to social and environmental challenges are growing. Climate change and developing a climate positive economy (addressing social gaps, COP26) are crucial catalysts for shifting global business strategies to incorporate sustainability and impact. I am enthusiastic about the impact revolution. Come on onboard!
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