What is the difference between sustainable finance and impact investing?
Sustainable finance is focused on integrating ESG factors into financial decision-making processes, while impact investing is focused on making investments specifically aimed at generating positive social and environmental impact.
Impact investing allows for a more direct and measurable impact on specific issues, while ESG investing provides a broader framework for considering sustainability factors across a range of investments. Ultimately, the "better" approach will vary for each investor.
An impact-investing strategy is an investment strategy that targets companies or industries that produce social or environmental benefits. For example, some impact investors seek to support renewable energy, electric cars, microfinance, sustainable agriculture, or other causes that they believe to be worthwhile.
While ESG investing operates as a framework to assess material risks and opportunities for firms, impact investing is an investment strategy that seeks to first and foremost create a specific, measurable social or environmental benefit.
While both ESG and sustainability are concerned with environmental, social, and governance factors, ESG focuses on evaluating the performance of companies based on these factors, while sustainability is a broader principle that encompasses responsible and ethical business practices in a holistic manner.
Here are a few categories that fall under the heading of sustainable finance with links to definitions: green bonds (also explained in more detail below) impact investing (also explained in more detail below) microfinance.
Sustainable finance is about financing both what is already environment-friendly today (green finance) and what is transitioning to environment-friendly performance levels over time (transition finance).
NOUN: Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
There are a number of risks and challenges associated with impact investing. One of the key risks is that impact investments may not generate the intended social or environmental impact. Another risk is that financial returns may be lower than anticipated. There are a number of different types of impact investments.
Sustainability themed investing: investment in themes or assets and programs specifically related to improving social and environmental sustainability (e.g. safe and accessible water, sustainable agriculture, green buildings, lower carbon tilted portfolio, community programs).
Why do investors prefer ESG?
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
1. Investors are demanding ESG Investments: The shift to sustainable investing is so powerful because it's being driven by demand from investors. Investors – from individual savers to large institutions – are investing in sustainable strategies as they look to use their capital to help create a more sustainable world.
Since ESG funds invest in companies that utilizes resources sustainably, is sympathetic to the well-being of its employees, stakeholders and society and is committed to clean governance, the potential risks are reduced.
Climate finance provides funds for addressing climate change adaptation and mitigation, green finance has a broader scope as it also covers other environmental goals (e.g. biodiversity protection/restoration), while sustainable finance extends its domain to environmental, social and governance factors (ESG).
Green finance is primarily concerned with providing financial support to sustainable projects and technologies. ESG is more focused on evaluating companies based on their corporate sustainability practices and governance structures.
Unlike green bonds, sustainability bonds and loans are not directed towards a single project. Instead, their proceeds are also used to finance a broader array of environmental and social developmental activities.
While sustainability and ESG are closely related concepts, they have distinct focuses and governance implications. Sustainability takes a broader, holistic view, encompassing environmental, social, and economic dimensions, while ESG provides a structured framework for evaluating specific performance criteria.
SRI is a type of investing that keeps in mind the environmental and social effects of investments, while ESG focuses on how environmental, social and corporate governance factors impact an investment's market performance.
Impact-focused investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. By generating profits from an innovative business model, a company can pay financial returns to investors alongside doing something good for the world.
The United Nations Environment Programme (UNEP) defines three concepts that are different but often used as synonyms, namely: climate, green and sustainable finance. First, climate finance is a subset of environmental finance, it mainly refers to funds which are addressing climate change adaptation and mitigation.
Why choose sustainable finance?
Sustainable finance plays a key role in promoting the transition to a carbon neutral and sustainable Europe. By supporting projects that prioritize resource efficiency, healthy ecosystems and promote the circular economy, it helps reduce waste generation, promotes recycling and reuse, and protects ecosystems.
Sustainable finance is about making sustainability considerations an integral part of financial policy and decision-making with the aim to re-orient and scale up public and private investments towards meeting sustainability goals. The transition to a sustainable and fair economy entails substantial investments.
Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are industry terms often used interchangeably by clients and professionals alike, under the assumption that they all describe the same approach.
In fact, community development organizations and others having been making impact investments for decades using different terms to describe their work. These terms include mission investing, social investing, community investing, and more.
Impact investing can help reduce risk for financiers
Impact investing is a means of deploying capital that seeks to have a positive impact on society or the environment. This type of investment can be beneficial for financiers, as it allows them to reduce their risk while still earning an acceptable return.
