ESG vs Impact

As the impact forest grows, can we still see the wood from the trees?

Impact and ESG investing: what’s the difference?

“Don’t believe the hype, ESG funds focus on mitigating financial risk and if your client is looking for more you need to dial up the impact with Sustainable or Impact funds.”

Gavin Francis, CEO and founder of Worthstone

In a sector overloaded with terminology, comparing different types of investment can be confusing. Terms like ‘impact’, ‘ESG’, ‘responsible’ and ‘socially responsible’ are often used interchangeably.

When is an investment sustainable? What does responsible investment mean? Is it better or worse than sustainable? How does ESG investing fit in with this?

When language is unfamiliar, the risk of greenwash rises (intentionally or not).

Of course, there is no one ‘right’ investment approach. Clients will have different objectives and for many, and the market as a whole, this process is often a journey.

The key is making sure the label doesn’t trip you up when aligning your investment approach with the motivation of your clients.

Through our Impact Portal, we capture and codify decision useful data and insights to provide financial planners with independent analysis and tools to deliver investment solutions truly aligned to your client’s objectives.

The spectrum of capital: types of investment at a glance:

Our community of forward-thinking financial planners tell us this infographic is a useful way to talk clients through the investment approaches on offer. If you’d like a copy of this, please email: info@worthstone.co.uk

Infographic inspired by, but modified significantly, from the Bridges spectrum of capital.

ESG

ESG screening is just one lens through which to view a fund and can only ever give you part of the picture.

Ultimately, it’s a metric associated with financial risk and opportunity. This means potentially ploughing even more capital into companies and sectors which may be an unexpected surprise to your clients. As long as we understand what ESG is and what it isn’t, it can be a useful lens to view a fund through. But it’s only provides partial visibility.

Impact investing optimises for a set of desired outcomes, rather than just maximising one. It goes well beyond ESG screening and seeks to proactively place capital where it can make a restorative return to people and planet, plus a financial return to your client.

If a client’s goal is financial returns along with positive social and environmental impact, ESG screening is unlikely to fulfil/ meet their expectations.

The difference between ESG investing and impact investing is best illuminated when you look at real examples. The top rated ESG fund scores poorly when you take a more rounded view of its overall impact. It includes investment in arms and tobacco, which may not be what your client is expecting.

Impact

Like ESG, impact investing seeks risk-adjusted financial return. But unlike ESG, profit isn’t the only objective. Rather it’s a dual-purpose alongside a focus on specific positive outcomes, like combating climate change and poverty and creating a fairer and just transition to a more habitable world.

Impact investing achieves this by:

  • Proactively placing capital where it can make a positive difference – investing in companies that seek to solve environmental and social issues
  • Optimising for a specific set of desired outcomes, rather than just maximising one

See how financial planners use our Impact Portal to look under the label of a fund and the difference it’s made to their business.