Do you want to make an impact through investing? This head-to-head piece looking at sustainable investing vs. impact investing will help you understand how to achieve your goals.
A popular trend today is investing in companies striving to make a profound contribution to the world around us. Investors are seeking companies that can be beneficial financially and bring a positive impact. If you’re such an investor, this sustainable investing vs impact investing piece will help you understand how this kind of investing works.
Sustainable and impact investments have recently gained traction among investors. They were developed to address poverty’s root causes and nurture positive social and environmental effects.
They are similar in that both seek to achieve positive social and environmental outcomes while generating financial returns. While the two are often used interchangeably, there are several differences between them.
This piece takes you through sustainable investing vs impact investing. It gives you all the crucial details about the two types of investment strategies.
Let’s get into it:
Table of Contents
- Sustainable Investing vs. Impact Investing Definition
- What is Sustainable Investing?
- What is Impact Investing?
- Types of Sustainable Investing vs. Impact Investing
- Sustainable Investments
- Types of Impact Investments
- Examples of Sustainable Investing vs. Impact Investing
- Sustainable Investing Examples
- Impact Investing Examples
- Impact Investing Organizations
- Sustainable Investing vs. Impact Investing Pros and Cons
- What are the Pros and Cons of Sustainable Investing?
- What are the Pros and Cons of Impact Investing?
Sustainable Investing vs. Impact Investing Definition
What is Sustainable Investing?
According to Investopedia, sustainable investing is “a broad term that refers to a variety of approaches in the financial markets aimed at building long-term wealth and creating positive social change.
This approach to investment focuses on environmental, social, and governance (ESG) criteria. It aims to generate superior returns by investing in companies whose management employs sustainable practices.
It is committed to long-term growth whilst avoiding investments in companies whose business practices are unsustainable.
Sustainable investments seek to preserve the environment and achieve financial stability. They may take various forms, including;
- Investments in renewable energy
- Sustainable development
- Organic farming
Sustainable investing aims to create portfolios that will provide financial stability and achieve positive long-term performance. Therefore, investors pick companies not just for their intrinsic value.
They also consider the positive change they will bring to society.
What is Impact Investing?
Like sustainable investing, impact investment is an investment methodology that aims to achieve positive social and environmental impact. Impact investing is a sub-branch of sustainable investing.
Impact investors are typically individuals, organizations, or funds who invest in environmentally and society-friendly businesses. They promote businesses and projects that improve society or the environment.
Impact investing combines social goals with financial objectives. This way, they make financial institutions, corporations, governments, and non-profit organizations bring meaningful and positive contributions to society.
Impact investing is a new way of developing projects that improve people’s lives in underdeveloped countries. It is a way of putting money to work for larger purposes for the community.
As it goes with its name, the purpose behind impact investing is to produce a positive difference for the world’s citizens.
Types of Sustainable Investing vs. Impact Investing
There are several types of sustainable investing you can consider. They include:
1. Environmental, Social, and Governance (ESG) Investing.
ESG investing is profiting from social, environmental, and governance considerations. These have become increasingly important in investment decisions. Generally, it involves investing in companies or assets that meet specific minimum standards for ESG performance.
There are many different ways to measure ESG performance. Some of the key ESG factors include:
- Reducing greenhouse gas emissions,
- Improving employee and community well-being,
- Complying with ethical standards (e.g., human rights, environmental and consumer protection),
- Maintaining independence from political pressures or business risks to make informed decisions.
Some companies may have a more holistic ESG strategy than others. But, they all seek ways of contributing towards sustainable development throughout their operations and investing responsibly.
2. Socially Responsible Investing (SRI)
Socially responsible investing is a type of investment that seeks to make money while doing something good for society. This might include promoting environmentally friendly practices or improving social mobility. SRI usually means investments in companies with positive social and environmental impacts.
SRI has been growing in popularity in recent years. Many banks and asset managers now offer SRI as a part of their investment products.
However, SRI has also attracted significant criticism and legal disputes, particularly in the United States. Critics say it pushes for socially sound projects which may not be economically rational. They note that the approach ignores projects more likely to lead to higher returns.
3. Ethical Investing
Ethical investing is a philosophy that uses investment principles to uphold specific moral or ethical values. Ethical investors avoid companies that could negatively impact the environment and society. This is called negative screening, where investors exclude certain companies from their investment portfolio.
For instance, investors might avoid companies involved in:
- Animal testing,
- Weaponry and firearms,
- Oil and gas harvesting and more
4. Green Investing
Green investing is a recent trend in the investment world that focuses on environmentally friendly investments. This includes:
- Purchasing stocks in companies that use sustainable practices,
- Investing in renewable energy projects, etc.
5. Impact Investing
As we’ve seen, impact investing is creating suitable vehicles for helping achieve sustainability. It offers capital programs to investors looking for better reasons than profit alone.
Investors seek to put their money to make a difference and generate returns as well. The idea is to finance socially and environmentally-motivated companies.
Impact investors invest in companies that impact education, healthcare, infrastructure, food & agriculture, green energy, social ventures, etc.
6. Value-based Investing
This is a way of evaluating and trading securities by focusing on factors such as;
- Asset value and other fundamental characteristics
Investors who pursue value-based strategies try to find high-quality stocks undervalued by the market.
7. Conscious Investing
Lastly, this is an approach to investing that emphasizes thoughtful consideration of an individual’s financial needs and goals. It also looks at the long-term potential of a particular security or asset class.
Generally, it involves being aware of one’s feelings, motivations, and biases. Investors use these insights to decide which investments to go for.
See related: 12 Best Renewable Energy Stocks To Invest In Today
SRI vs. ESG Investing
As we have seen earlier, both are sub-categories of sustainable investing. While the SRI focuses on socially responsible investing, ESG investments focus on the impact that environmental, social, and governance issues have on investments.
These two investment approaches all help investors to invest in companies and funds that make a difference. SRIs encourage investors to support companies that improve the well-being of society. On the other hand, ESGs use environmental, social, and corporate governance issues to determine how an investment is.
When comparing ESG vs. SRI investing, the difference is almost the same. They are designed for investors who want to do more for the environment and society than just make profits.
Types of Impact Investments
There are many types of impact investments, but a few of the most common include:
1. Social Impact Investing (SII)
This type of investment focuses on solving social or environmental problems. They do so by investing in companies or projects that can make a positive impact.
SII investors seek to identify, fund, and grow companies that generate positive social and environmental effects. But, they also look at high-quality returns.
2. Environmental Impact Investing
With this investment approach, the focus is on reducing environmental impact or improving environmental sustainability in companies or projects. Environmental impact investing (EII) is a financial model that aims to generate positive social and ecological returns.
Generally, it does so by driving innovation in sustainable practices while improving the financial performance of investors. It combines the power of capital markets with sustainability concerns to achieve broad-based, systemic change.
EII (environmental impact investing) has emerged as an essential tool for investors and institutions. It helps them to identify, evaluate, and invest in opportunities that create environmental or social benefits. Funds based on EII, focus on identifying start-up and mature companies where potential investment returns are tied to the impact of a project or business process.
3. Community Development Impact Investing
This investment focuses on supporting economic growth by building up and improving local communities. Community development impact investors can be individuals or organizations. And, they invest in companies or projects to impact communities positively.
By doing so, they can help to improve the quality of life for people in those communities while also making money. Development impact investing can be an effective way to generate financial returns and support social good.
4. Ethical Investing
Ethical investment is a type of investment that aligns with ethical principles. This can include investing in companies that operate responsibly, employing people fairly, and helping reduce poverty rates.
There are many ethical considerations when investing. This is because each individual may have different values and beliefs about what constitutes an ethical investment.
Here are some common factors to consider:
- The company’s social and environmental impact,
- The effects of their operations on workers’ rights and health, whether they pay a fair wage to employees (including benefits like maternity leave),
- How well they treat local communities where they operate,
- Quality of issues surrounding human trafficking in supply chains or child labor as product components.
Examples of Sustainable Investing vs. Impact Investing
Sustainable Investing Examples
Sustainable investing is a diversified investment approach. It seeks to help investors reduce environmental and social risk and improve long-term financial performance.
Examples of sustainable investing include:
- Investing in companies that have a strong environmental or social impact.
- Buying stocks of companies using renewable energy sources, such as wind power and solar panels.
- Investing in companies that use natural resources efficiently, such as those that recycle or reuse materials.
- Invest in companies with high standards of ethical, social, and environmental values.
- Creating a portfolio of companies with substantial environmental, social, and governance (ESG) policies.
- Investing in companies that are developing or transitioning to more sustainable production methods.
- Diversifying your wealth across asset classes to mitigate potential volatility and increase stability.
- Diversifying your portfolio across asset classes to minimize possible fluctuations and create balance.
- Investing in companies that are developing or transitioning to more sustainable production methods.
Examples of organizations involved in sustainable investing in the US include:
- The Sustainable Investment Institute (SII). It’s an organization that focuses on sustainable investing in the United States. SII provides information and resources to investors, policymakers, and practitioners interested in sustainable investment.
- The Natural Resources Defense Council (NRDC). It’s an environmental organization that has been involved in sustainable investing for over 25 years.
- US Green Building Council (USGBC). An organization that advocates for green building practices.
- The World Resources Institute. This is a national government-funded environment nonprofit organization and the most significant global research organization. It focuses on sustainable development issues, such as defining sustainability, promoting environmentally intelligent, etc.
Impact Investing Examples
There are several ways impact investing can positively impact the world. Below are just a few examples:
- Investing in companies that create environmental sustainability initiatives
- Supporting social entrepreneurship
- Making donations
- Investing in renewable energy initiatives
Impact Investing Organizations
Examples of organizations involved in impact investing include the following;
- Philip Morris International Foundation: It manages funds that aim to help global smokers quit smoking.
- The Vanguard Charitable Endowment Group: Focuses on grants for voluntary organizations that help tackle climate change and improve sustainable development worldwide.
- Millennium Promise and Wellcome Trust fund: Focuses on strategic interventions to end poverty in Africa.
- Better healthcare,
- Improve education,
- Promote agriculture for food security and
- Eliminate the spread of HIV/AIDS through programs that involve a long-term commitment of resources (Millennium Promise).
Sustainable Investing vs. Impact Investing Pros and Cons
What are the Pros and Cons of Sustainable Investing?
- Helping to mitigate environmental, social, and economic risks.
- It helps you make money while impacting the planet positively
- Lack of consensus over what constitutes a sustainable investment,
- Lack of transparency in the sustainable investment market.
What are the Pros and Cons of Impact Investing?
- Help solve social and environmental problems,
- Generate financial returns for investors, and
- Promote corporate social responsibility.
- It is challenging to identify which projects will have the most significant impact,
- There is a risk of losing money on investments,
- It can be challenging to penetrate the market.