Impacting investing is a relatively new investing strategy which balances generating wealth with achieving certain positive social and environmental effects. For many, impact investing is an incredible opportunity to do good while enjoying financial returns.
Anyone interested in leveraging the power of impact investing would do well to pursue a sustainable finance and investment online course offered by one of the world’s most prestigious universities. These courses are designed to help investors make informed, sustainable investment decisions to achieve their goals. Still, it might be useful for beginner impact investors to learn a few key terms before they start their course and launch their investment strategies.
Environmental, Social, Governance (ESG) is a set of criteria that investors use to understand companies’ sustainable and ethical impacts. Environmental criteria assess company performance in protecting natural resources; social criteria reflect how a company manages relationships with employees, customers, suppliers and communities; and governance criteria examine company policies, with focus on internal system controls.
The ESG system developed from the belief that companies with stronger ethical standards are likely to be more profitable in the long term — partly because they are less likely to be sued for unethical practices. In truth, ESG is not an effective tool for identifying the most environmentally or socially conscious companies, but rather ESG is best for helping investors find companies that balance profitability with safe environmental, social and governance policies.
Though the term “sustainability” is most often used now to refer to initiatives for environmental sustainability, in this case, sustainability refers to a company’s likelihood to survive and thrive. Sustainability investing relies heavily on ESG criteria to guide investors toward companies that are more likely to continue operating profitably into the future. The key here is the enhancement of value or profit in an investment portfolio.
Another method of applying ESG criteria, responsible investing involves using the information gained from ESG assessments to mitigate risk within an investment portfolio. Responsible investors tend to believe that companies failing to uphold ESG standards will lose profitability over time. Thus, investors can utilize responsible investing techniques to maintain value and profit into the future.
Socially responsible investing
Socially responsible investing is the practice that most investors imagine when they hear about impact investing. This method of investment involves using personal ethics to guide investing decisions. The manner and degree to which an individual investor allows their personal beliefs to impact their decision-making can vary; some may refuse to participate in some lucrative investments because they fundamentally disagree with industry practices, and others may build portfolios to advance progress toward a specific social impact goal. Oftentimes, socially responsible investors will utilize ESG reports, but this is far from the only information this type an investor will seek out to guide decision-making.
Negative screens are ways for investors to avoid and exclude investments that do not meet their ethical standards. Different investors will maintain different negative screens; they may filter out investments in certain countries or sectors, or they may select specific companies to screen out. Most often, investors engage in negative screening by eliminating the companies that score below a certain level in ESG reporting. Investors should reflect on their goals and ethical interests before creating their policies for negative screening.
Spectrum of values
Impact investing exists as a spectrum, and how investors choose to behave with regards to their investments can determine where they fall on the spectrum. Many of the categories along the impact investing spectrum are discussed above, but those interested in understanding the spectrum as a whole can review the different levels here:
Profit-only investing. Investors in this category do not engage with impact investing in any capacity; they are interested only in maximizing their returns, regardless of the impact of their investment on the environment, surrounding community or greater society.
Responsible investing. Investors in this category are focused on eliminating long-term risk by adopting ESG criteria.
Sustainable investing. Investors in this category strive to enhance value in their portfolio by adopting ESG criteria.
Socially responsible investing. Investors in this category adjust their investments based on ESG criteria as well as personal ethical guidelines regardless of the financial impact of those decisions.
Impact investing. Investors in this category seek specific impacts through their investments. They may or may not be concerned with the competitiveness of their returns as long as they are contributing toward progress for their goal.
Impact-only investing. Investors in this category have no expectation of seeing a positive return on their investments. In many cases, investors will make contributions through zero-interest loans, grant programs and other offerings that do not benefit them financially.
Beginner impact investors have plenty of decisions to make regarding their investment strategies, and the more they learn about the terminology of impact investing, the more effective their strategies will be.