Giving Compass' Take:
- Jaclyn Foroughi, writing for the Stanford Social Innovation Review, provides a detailed overview of the differences between ESG and impact investing.
- Why is it crucial for donors to understand these differences? What are the implications of these practices on the charitable giving sector?
- Learn more about impact investing here.
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If you find yourself using the terms ESG and impact investing interchangeably, you’re not alone. Some of the smartest and most sophisticated educators and investors in the world have trouble distinguishing between the two. And these are people overseeing billions, if not trillions of dollars, collectively.
Coined in 2004, ESG emerged as a joint effort by the UN, the International Finance Corporation (IFC), and the Swiss Government to support the financial industry’s consideration of ESG issues in mainstream investment decision-making (although its roots exist in the socially responsible movement, or SRI). This is not surprising given that much of the underlying progress in socially- or environmentally-focused investing over the last 15 years has been driven by governments, particularly those in the EU and the UK. (Sorry, but the US didn’t catch on until 2011.)
Impact investing, on the other hand, wasn’t coined until 2007 when the Rockefeller Foundation, along with other philanthropists, investors, and entrepreneurs, put a name to investments made with the intention of generating measurable social impact alongside a financial return. This group would go on to found the Global Impact Investing Network (GIIN), the leading network of practitioners promoting the infrastructure, research, and education around impact investing.
Thus, while ESG was ushered in by the public sector, impact investing evolved through efforts by the private sector. As a result, ESG attempts to serve as a guideline for public understanding of environmental, social, and governance factors, while the for-profit nature of impact serves as an incentive to act in favor of and drive capital toward these interests.
Three principles define impact investing: first, there must be an expectation of financial return alongside social and/or environmental impact (or at least a return on capital); second, the change sought—typically social or environmental—must be intentional; and third, there must be an attempt to measure the change.
With that context, let’s consider six additional ways ESG and impact investing are different:
- ESG is a framework. Impact investing is a strategy.
- ESG faces fiduciary scrutiny. Impact does not.
- ESG can be risk-mitigating or an opportunity. Impact is both.
- ESG is generally a financial-first framework. Impact investing generally equally weights financial, social, and environmental impact.
- ESG-focused investments are primarily public market entities. Impact investments are primarily private market entities. But could that change?
- All impact funds are ESG-compliant, but not all ESG funds are impact.
Read the full article about ESG vs impact investing by Jaclyn Foroughi at Stanford Social Innovation Review.