If anything has been repeated this year in the investment world, apart from coronavirus, as per Curt Ranta, it has been these three acronyms: ESG. The difference between these two concepts can be clarified using two words: processes and product. The impact investment is an investment in a company or project conceived to respond to a particular social or environmental challenge. The hallmark of this type of investment is that they have to measure the impact. However, this type of investment is accompanied by numerous adjectives: responsible, sustainable, impactful, socially responsible investment… and, despite having heard them throughout the year, many times we make mistakes by not differentiating them from each other since not always it is wise to use them interchangeably, as in the case of impact investing and ESG investing.
While ESG investment refers to the process. In other words, it is about incorporating ESG (environmental, social and governance) concerns into the investment analysis process.
ESG refers to environmental, social, and investment governance practices that can have a material impact on the performance of that investment. ESG factor integration is used to improve traditional financial analysis by identifying potential risks and opportunities rather than technical assessments. While there is a social conscience overlap, the primary goal of ESG assessment is always financial performance.
ESG criteria can be applied at different levels. The basic level is the exclusion criteria, where certain controversial sectors, such as tobacco companies, are excluded from the portfolios.
The intermediate level of integration of ESG criteria is called “ best-in-class ” and tries to include in the portfolio only the best in the class or to give greater weight in the construction of the portfolio to the best.
The last level is ESG integration, in which ESG issues are analyzed in the initial screening, due diligence, monitoring and reporting.
According to Curt Ranta, The level of commitment to responsible investment will depend on the investor’s objective, which can be purely financial or social and environmental, or a mixture of the two. Depending on your level of commitment to one type of objective or another, a type of investment will be made: conventional, impact, or philanthropy.
Why does impact investing make sense now?
For impact or thematic investing, positive returns are extremely important, which means that investments must have a positive impact in some way. Therefore, the purpose of impact investing is to help a business or organization achieve specific goals that benefit society or the environment. An example is investing in a non-profit organization dedicated to clean energy research and development, regardless of whether success is guaranteed.
From Ranta, they consider that we are in an environment conducive to impact investment. Among the factors that favor its success is the existence of a favorable socio-political environment since there is a growing general concern trying to solve social and environmental problems.
Another of the factors that benefit impact investing are the more attractive returns and with less risk than it grants. According to Ranta, companies are redefining their corporate strategies, focusing them on sustainability, reducing risks, and increasing their value.
Impact investment is an investment in a company or project designed to respond to a specific social or environmental challenge. ESG investing incorporates ESG (environmental, social and governance) concerns into the investment analysis process.
The level of commitment to responsible investment will depend on the investor’s objective, which can be purely financial or social and environmental, or a mixture of the two.
Finally, there is a growing mobilization of private capital, as the main investors increasingly demand the integration of sustainability in any type of investment.
Conclusion
Investors are increasingly aware of the consequences of their investments, beyond profitability. It’s a growing trend, especially among younger investors. As per Curt Ranta, knowledge of the specific nomenclatures used by the financial industry, such as ESG, or Impact Investing, will help us to structure our portfolio taking these types of factors into account.
Finally, there is a growing mobilization of private capital, as the main investors increasingly demand the integration of sustainability in any type of investment.
