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Demystifying the Options
Industry-wide standardized definitions between impact, SRI and ESG investing, are at an early stage and this can result in confusion for investors and advisers.
Responsible investing is, in essence, an umbrella term for the various ways that investors can consider ESG issues. Impact investing is one type of approach to responsible investing.
“One way to think about the difference between ESG and impact investments is that impact investments don’t often need to use negative screens. They don’t exclude things because their sole purpose is positive, and their investment teams only look to include companies that create a positive impact or outcome”
– Hope Evans, Financial Adviser & Director of Simply Ethical Advice.
Interesting Note:
What is interesting to note is that all impact funds are ESG compliant, but ESG compliant funds do not necessarily make an impact. For example: Under an ESG investment framework, a fund could exclude or prevent investment in companies that produce significant carbon gas emissions. With an impact investing strategy, they can invest in a product or service that actively helps to reduce carbon gas emissions.
“Many people have different definitions of what Impact Investing means, so it’s often quite blurry. However, if you go to the Responsible Investing website, they have a place where you can learn and the table (below) they use to explain the responsible investing universe provides a clear overview of the options. Impact investing is the step before Philanthropy in that you’re investing for a positive social or environmental outcome while also making a return”.
– Hope Evans, Financial Adviser & Director of Simply Ethical Advice.
FIGURE 1: THE SPECTRUM OF CAPITAL IN THE “IMPACT ECONOMY”
Source: Bridge impact, The Impact Management Project, 2019
As you move from left to right in the table above, it indicated the specificity and intentionality of the strategy and illustrates the impact that is delivered. This means that the further to the right you go, the more definable and measurable the impact becomes. This doesn’t necessarily mean you’re creating more impact – but it does mean you’re able to have greater insight into the impact you’re generating and can demonstrate more accurately what that impact is.
Regulation of Products
There is a lot of jargon in the Responsible Investment space. There are many different ways to measure responsible investing and rating systems that lack consistency in regulation.
Globally, there are various voluntary frameworks and standard-setters, ratings and rating houses. To help with standardisation, it was recently announced at COP26 that International Sustainability Standards Board (ISSB) would be created to provide globally aligned and accepted sustainability reporting standards.
Globally aligned standards will be a powerful tool, particularly for investors with global portfolios, helping to mitigate some of the challenges posed by existing disparate regulatory and voluntary disclosure and reporting frameworks. However, this is still in development, and challenges remain in the interim.
A Note on Greenwashing
From an impact investing perspective, greenwashing is when an investment does not provide the impact that it is marketed to be providing. The risk of greenwashing can be reduced by selecting investments that provide intrinsic transparency around their investment approach, methodology, impact measurement and tracking. Reporting should be clear, concise, timely and transparent.
Advisers have the opportunity to add value by supporting clients to make sense of the choices available and simplify the complexity.
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