After reading part one Impact Investing 101 – What You Need to Know, you are probably wondering how impact investing compares to other sustainable investing strategies. This article will showcase how impact investing sizes up to alternatives and how sustainable investing strategies differ. By the end, it should be clear why FLIT Invest sees impact investing as the way forward as the most sustainable investing strategy.
Traditional vs. Impact Investing
Traditional investing is what you usually see or hear about in movies about Wall Street or big corporations. It is only about maximizing your financial returns, i.e., making money. Like all investing, people are prepared to take different levels of risk.
Behavioral economists put this on a spectrum of risk-averse to risk-tolerant. Risk-averse people try to avoid the risk they face in the market, whereas risk-tolerant people are more willing to take on considerable risks to make more profit. Traditional investors do not necessarily consider the consequences of their investments or the negative or positive spillover of those investments.
On the other hand, impact investing aims to make market-level financial returns AND a social/environmental impact. As we explained in part one, impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return,” according to the Global Impact Investing Network (GIIN).
Thus, the difference between traditional and impact investing is that you want to make a social/environmental impact. In impact investing, you also get the benefit of selecting finance-first investments or impact-first investments based on your preference.
What about other sustainable investment strategies?
Impact investing is a sustainable investing strategy, but what is sustainable investing? According to Harvard Business Review, sustainable investing “refers to a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value.”. Simply put, sustainable investing is everything else that is between traditional investing and charity. Sustainable investing is also often called responsible, ethical, or moral investing. Sustainable investing strategies also include ESG and SRI.
SRI vs. Impact Investing
Screening Harm is Not Enough. SRI (Socially Responsible Investing) is more about risk mitigation and management. It avoids harmful investments that do not align with your values, excluding certain companies from your investment portfolio.
As a result, SRI is also often referred to as negative screening. For example, you can avoid investing in fossil fuel companies if you want to fight climate change. Impact investing moves beyond risk mitigation; it generates positive impact and actively seeks opportunities to create this impact. After all, impact investing wants to add something positive to the world and not just be a “bit less bad” for the world. We should invest in green energy as well as divest from fossil fuels to generate a positive environmental impact.
ESG vs. Impact Investing
Different Risk Factors Do Not Capture Impact. ESG (Environmental, Social, Governance) investing is a framework that assesses the financial risk posed to a company by Environmental, Social, or Governmental factors.
For example, it could mean the harm they do or don’t pose to the environment with their practices, how they treat their workers and the communities, and their regard for gender equality among their employees. ESG assessments look at a company’s current practices and provide a score for E, S, and G. The companies are rated according to many factors and receive a final ESG score based on their performance across all three categories. This measurement does not capture the real-term impact of the company’s operation – that would be impact investing. You can read more about the complexities and shortfalls of ESG in our articles Where Next for ESG? and ESG In The News Again – What is it This Time?
Is impact investing the best form of sustainable investing?
In our opinion, yes! Impact investing puts rigorous measurements of impact based on several frameworks, most notably IRIS platform by the Global Impact Investing Network and the UN SDGs (United Nations Sustainable Development Goals), while promising market-level returns. ESG and SRI strategies do not ensure impact but rather avoid social or environmental harm or, at most, change a company’s strategy. They need to ensure continuity and accountability like impact investing does. In ESG, a company might receive a good score because of stellar performance in one of the three areas but lacks in the other two. The averaging score is how many fossil fuel companies sneak into ESG funds – their E score is low, but they score high for S and G. Impact investing overcomes this.
Impact investing is about taking action and pursuing a positive social and environmental impact. It goes beyond what other forms of sustainable investing offer. Impact investing adds tools from ESG and SRI and ensures impact measurement of investments. Impact investing has the benefit of going beyond what charities or other sustainable strategies do and ensures sustainable flows of income that you can reinvest in bettering the planet.
To us, impact investing is a no-brainer! Make an impact and make financial return – yes please. The future is impact, join the wave! Check out our fully automated platform today and grow your wealth guilt-free.
Footnote 1: Content is for informational and educational purposes only. Any views, strategies or products discussed may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. The information contained herein should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing.
