According to Bloomberg, environmental, social and corporate governance (ESG) investing is likely to cross $50 trillion by 2025 while impact investments are currently estimated at around $1 trillion. As ESG investing becomes more accessible and scalable, sustainable finance experts are asking will impact investing be subsumed by ESG and become a sub-category of ESG investing?
The reason this question is important is because ESG investment can learn a lot from impact investment and this distinction might be good for the world. ESG investing is often looking for the ‘business case’ of doing good, while impact investing says that we are here primarily to do good. If impact investing disappears, the champions of green finance and social finance who put communities first, might disappear as well, leaving the ESG rules of engagement at the mercy of pure capitalism.
Simply put, it is far easier to convince global mainstream investors to ‘do no harm’ than to do good and this will serve as an inhibitor of growth for impact investing within the eruption of the ESG industry.
To understand this tension further, we need to recognise the fundamental differences between ESG investing and impact investing. These can generally be classified into three types.
Firstly, and most importantly, the intention of impact investing is to bring about some sort of net positive change to environmental, economic and social factors in ecosystems where money is being invested. This contrasts with ESG investing where the intention is either risk-management, weeding out bad apples or a ‘do no harm’ approach.
The second difference is that impact investing mostly deals with private equity-style transactions as compared to ESG investments where the volume of activity is in publicly traded company stocks or mutual funds. Impact investments are almost always made into companies (or funds) through mergers and acquisitions transactions directly without the use of retail or commercial banking platforms which are available to the public.
A third difference is that impact investing has often been associated with investments that originate in the global north (developed economies) with capital flowing into the global south (emerging economies). This does not mean that one cannot carry out impact investing in North America or Europe, or that it does not happen, but simply that the surge of contemporary impact investing which began in around 2009 was more directed towards emerging markets and sustainable development, rather than domestic impact investing in ‘western’ countries.
The major influencers, actors and institutions are also critical in answering the question of will impact investing be subsumed by ESG investing?
The players driving ESG investing are traditional finance and investment entities like institutional investors, pension funds, banks, insurance companies, asset managers and private investment funds.
On the other hand, if we trace the capital which fits under the Global Impact Investing Network (GIIN) definition of impact investing, we will find more sustainable-development driven organisations like development finance institutions (DFIs), multi-lateral and bi-lateral aid agencies, social impact investors, foundations and non-profits. Thus, the total amount of wealth on the ESG side is far more than that being managed by intentional impact investors.
It is not that impact investing is useless or defunct. Not at all. Impact investing has a niche and important purpose and audience. However, the size of audience remains small because it comprises investors who have a clear and firm intention that their money should not only ‘do no harm’ but do ‘measurable good.’
Compare impact investing to weekend golf on an 18-hole championship golf course versus an open-air family driving range. Although they are both open to the public, the neighborhood driving range welcomes an array of populace from all kinds of socio-economic backgrounds, while the 18-hole championship course attracts a regular clientele with a narrower socio-economic background, better equipment and finer coordinated apparel. Impact investing is socially responsible investing on the 18-hole championship course, while ESG investing is responsible investment on the open-air driving range. ESG investing is simply more accessible to everyone and will continue to gain more visibility in the mainstream.
Whether we like it or not, impact investing is likely to get subsumed by ESG investing in the mainstream markets but will maintain its small and loyal following on the periphery, especially as we inch closer to the delivery of the sustainable development goals (SDGs) in 2030. Beyond that, only time will tell how impact investing will finds a place within ESG and a refreshed United Nations framework for sustainable development.
The writer is a doctoral researcher at the University of Waterloo on ESG & Private Capital Markets and founder of ESGTree.com, a tech start-up platform
Published in The Express Tribune, January 03, 2022.
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