Impact Investing is not ESG
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Impact Investing is not ESG
Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing https://swissfintechladies.ch/sftl-authors/
Scientists and some practitioners use the words environmental and social governance, Scientists and some practitioners use the words "environmental and social governance," or "ESG," and impact investing interchangeably, but the two concepts are materially different and need to be differentiated; otherwise, both concepts run the danger of becoming obsolete. While ESG is rooted in self-reporting about sustainability and materialises in at least yearly-published sustainability reports of the company, impact investing is something that defines the companies’ strategy.
ESG uses tools like the Global Reporting Imitative GRI framework, which is based on norms and international good practise like the World Bank Performance Standards. Impact Investing is using the 17 Sustainable Development Goals (SDGs) to create business models and strategies to implement them, thereby solving a societal problem using market mechanisms and making profits. To illustrate the difference, let us think about some integrated food and beverage companies. Some of them have been in the Dow Jones Sustainability Index for years or even decades for good ESG practises, like no child labour or forced labour, for instance, as they use the reporting framework efficiently.
Do they solve a societal problem with their business model? They often produce limonade with too much sugar, pack it in plastic bottles, carry it long distances, or even take groundwater away from local communities. But they apply an ESG framework efficiently, no doubt. The UN SDGs Healthy nutrition or no hunger, however, is not their purpose, not their business model, and often not reflected in their strategy.
A company creating clean water out of wastewater or creating clean energy, however, is directly contributing to the SDGs. Impact investing is therefore forward-looking, SDG-aligned, and SDG-driven, while ESG curbs negative impacts through management systems but often does not create a real, tangible positive impact on the ground. When we talk about companies creating impact or being SDG-aligned versus companies being ESG-aligned, we talk about asset impact.
A second angle in impact investing is the investor’s impact. Investors can have a huge impact by deciding to invest in a new technology that has no track record, bringing about innovation. Charly Kleissner, for instance, the co-founder of the Global Impact Investing Network (GIIN), invests solely his impact budget into companies that are first movers to get innovation kicked off.
What does that mean for women now? If women become investors, they are able to create both investor impact by investing in female-led start-ups and in SDG-aligned start-ups or companies. This has an investor impact and an asset impact. Read more over the next few weeks in our interviews about women as investors and asset managers.
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Karen Wendt
President of SwissFinTechLadies