The terms ESG and Impact investing get used interchangeably often. However, the difference is important to remember.
ESG Investing complements traditional financial analysis by adding a layer of due diligence on the company:
– Environmental impact of the company’s operations and its vertical integration
– Social consideration of the employee relations, health, and safety of its labor force and suppliers
– and Governance of the company leadership, the diversity of the board and their compensation, conflict of interest
Though ESG forces more due diligence in the above-mentioned factors, it is still connected to a traditional investment whose bottom line is monetary profit.
Impact investing takes traditional investing a step further and moves it beyond monetary gain. Not everything impactful gives monetary measurement, or a better statement would be that the current society hasn’t figured out how to measure it. Investors who are looking for impact investing are not focused on ROI in currency terms, but rather on a positive impact on investment; such as a company that is researching better recycling systems, and companies that are making eco-friendly plastic. These companies might not make monetary gains in the near to medium term as the research and labor cost is high. However, the impact of their operation can be huge on modern issues.
ESG and Impact investing are not mutually exclusive terms. One can have Impact Investing and ESG considerations at the same time when making investment decisions.
