Impact investing has been a prevalent topic of discussion recently, with a survey from Pitchbook finding that 56% of North American asset managers use an Environmental, Social, and Governance (ESG) risk factor framework, and 61% offer impact investing strategies. It can be seen as an extension of philanthropy and many investors and asset managers are adopting impact investing strategies to their general investing strategies.
What is Impact Investing?
Impact investing is an investing strategy that involves selecting investment opportunities and businesses that aim to make an impact to social and/or environmental causes. Common impact investing industries include healthcare, education, clean and renewable energy, agriculture, and also expand into other industries. The main idea of these investments is to help align investing goals with your values. In an ideal world, an investor could see their investments align with and benefit social or environmental causes. While investment returns and social or environmental change are not guaranteed, impact investing is a strategy many investors have been choosing to utilize in recent years.
First termed in 2007, impact investing and socially responsible investing has existed in other forms. There are a couple subcategories of impact investing, outlined below.
Environmental, Social, and Governance Investing (ESG)
ESG Investing is a subcategory of impact investing that uses a set of criteria to evaluate a company’s environmental, social, and governance track record. Environmental criteria include carbon emissions, deforestation, pollution, and green energy initiatives. Social factors include employee diversity, fair labor practices, and human rights. Governance factors include lobbying, board member diversity, and political donations. These criteria are used to set an ESG score, which measures the long-term commitment of the company to one or more ESG categories. There is not a standardized set of ratings for ESG categories, so they are subjectable criteria which may have different results from different evaluators. Nevertheless, ESG investing has attracted significant attention recently and many asset managers use this framework to help choose investments.
Socially Responsible Investing (SRI)
Socially Responsible Investing takes ESG investing to another level by actively selecting or eliminating investment opportunities based on specific ethical guidelines. SRI investing typically takes ESG factors and can approve an investment opportunity that reaches a certain score or reject opportunities based on the score. One example of an SRI metric would be the refusal to invest in companies involved in alcohol, tobacco, or gambling. Instead, SRI investors may seek out alternative energy sources or companies leading social justice initiatives. Socially Responsible Investing tends to mimic political and social climates, for example in the 1960s, investors were focused on contributing to women’s rights, civil rights, and the anti-war movement. Investors should be aware of these trends as the investment may suffer if the social value decreases in popularity.
While a perfect world would combine investing outcomes and social impact, the two factors do not automatically go hand in hand. An investment opportunity providing social impact is not guaranteed to produce financial gains. Instead, impact investing helps provide a way to help align your investing goals with your values.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.