Impact Investing vs ESG
What’s the difference between ESG investing and impact Investing and why do both of these approaches matter?
Environmental, Social, and Governance (ESG) and impact investing are often lumped together, but there are meaningful differences between these approaches. With so much positive and negative spin and contradictory coverage of ESG and impact investing, many investors are understandably confused about what these terms mean and how they differ in practice.
I have worked in the sustainable finance industry both in the United States and in emerging markets – for over 24 years and now lead one of the longest-serving ESG- and impact-focused investment advisory firms in the US. To help investors better understand the differences between ESG and impact investing, I will briefly compare the purpose, measurement practices, investment approach, and market size of each.
Purpose
What is ESG?
The aim of ESG is to mitigate risks and identify sustainable growth opportunities, while maintaining traditional financial goals. ESG Investing focuses on integrating environmental, social, and governance factors into the investment decision-making process – usually in public markets (for companies listed on a stock exchange).
What is Impact Investing?
Impact investing goes a step further than ESG by explicitly seeking to generate measurable, positive social or environmental impacts alongside financial returns. It is not just about avoiding risks – it is also about driving measurable change. Also, impact investing usually applies to investments in private companies. Despite what you may have heard, impact investing is not philanthropy.
Measurement
Evaluating Investments via Company ESG Ratings
ESG criteria are typically used to evaluate companies based on their performance in key areas like carbon footprint (e.g., is the company emitting more CO2 than its peers?), labor practices (e.g., does the business use child labor?), and corporate governance (e.g., is there an independent board? Are there checks on the CEO?). Investors use ESG ratings to assess the long-term viability and ethical standing of companies.
Measuring Impact Outcomes
Impact Investing requires concrete, measurable results in social or environmental areas. This often involves setting clear impact targets, such as improving healthcare access, or supporting underserved communities. For example, an impact investor focused on community wealth building might invest in a fund that provides low interest loans to entrepreneurs in native-American communities. Impact investors want to see reporting that shows the outcomes their investments helped achieve. This same investor might want to see the actual number of high-quality jobs created in that specific community – thanks to the investment made.
Our firm provides impact reporting directly to our clients and we publicly release an annual Impact Report that highlights the collective social and environmental impact our clients’ investments helped achieve.
Investment Approach
Positive and Negative ESG Screening
ESG Investing is often about screening investments, either positive (selecting companies with strong ESG practices) or negative (excluding companies that do not meet certain ESG standards). These standards can vary hugely: they depend on the values and preferences of the investor. This is why politicizing the sector does not make sense – any investor, with any values can be an ESG investor.
Investing for Impact
Impact Investing tends to involve proactive investments in industries or companies directly tied to positive societal or environmental outcomes, such as renewable energy, affordable housing, or education. It is more mission-driven, often aligned with specific causes or goals.
Comparing Market Size
Recent data shows that the impact investing and ESG markets differ significantly in terms of size.
In 2023, the GIIN (Global Impact Investing Network) reported that in the US and Canada combined, the impact investing market represented $198 billion.[1]
According to research published by US SIF (Sustainable Investment Forum) at the start of 2022, the ESG investing market in the US amounted to $8.4 trillion in assets under management (AUM).[2] This represents 13% of all professionally managed assets in the US – so it is a much larger sector.
Stephanie Cohn Rupp is CEO and Partnership Chair at Veris Wealth Partners, an investment advisory firm focused on helping families and foundations align their investments with their mission, values, and vision. She also serves as a Board Director and Board Secretary of US SIF, a member of the Impact Assets 50 Review Committee, and an advisory board member to the Panel of Recognized International Market Experts in Finance (PRIME Finance) based in the Hague. Full bio.
Disclaimer
The information contained herein is provided for informational purposes only and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass. Additionally, this document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such third party sources and take no responsibility therefore.
