ESG Investing Versus Impact Investing, According To Jefferies

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(Credit: Global Impact Investing Network)

Today, financial services firm Jefferies published a report on impact investing, detailing it’s similarities and differences to Environment, Social, and Governance (ESG) investing.

The report defines each term in the following way:

Traditional Impact Investing is defined as committing capital towards explicitly addressing social or environmental problems. There may also be an additional objective to generate a financial return, however its defining characteristic is investing with the deliberate intention of delivering a positive impact.

ESG Investing is largely understood to be an integrated assessment of traditional investment considerations and ESG factors in the evaluation of company or portfolio risk and return. This is historically broadly related to mitigation of downside ESG risks.

Jefferies identifies an emerging trend in which these two investment forms are synergized:

ESG Investing with Impact is a desire for capital allocators to deliver sustained alpha on a risk adjusted basis while also targeting positive real economy impacts. This dual objective and an ability to demonstrate the positive impact accrued are defining characteristics.

The report identifies a growing consensus that ESG investing is not producing the positive outcomes expected of it, with “limited progress in delivering positive change in a number of

sustainability-related issues.”

The explanation provided for ESG’s poor performance is that while risk management tools may be a necessary component of greening investment, they are not sufficient on their own to reorient capital flows to address sustainability challenges.

Jefferies points out that investing is always an indirect impact: the hope is that one’s funds will find their way into hands capable of enacting positive change. Impact addressing is said to be less indirect than ESG by virtue of its practice of committing capital towards explicitly addressing social or environmental problems.

The corporate sector is feeling increasing pressure from asset owners, regulators, and civil society to invest responsibly. To increase the chances of success, Jefferies offers five impact investing considerations:

  1. Identify a specific area of impact as the investment focus.
  2. Isolate the type of solution to invest in within the impact area.
  3. Determine the investment strategy to be employed (e.g. public vs. private, debt vs. equity, etc.).
  4. Define appropriate return characteristics that account for rate of change, scale of impact and returns to financial, human and natural capital.
  5.  Establish time horizons and evaluation metrics to prepare for financially supporting change efforts overtime. 

Last month, Jefferies published a report detailing how geopolitics, regulations, public attitudes, and corporate initiatives will impact the ESG investing sector in 2022.