A common mistake investors and advisors can make is the belief that environmental, social, and governance (ESG) investing and impact investing are interchangeable ideas and terminology when, in actuality, they are related but ultimately different things. Andrew Lee of UBS and Kim Griffin of Toniic recently sat down with Worth to discuss the differences.
ESG is, broadly speaking, a criteria for investing that encompasses a broad range of ideas, approaches, and priorities. It includes a range of data sets and can have various goals when investing within ESG. ESG investing is typically focused mostly on the financial aspect; many advisors and investors see the potential for growing returns within ESG and therefore seek to invest for financial gain.
Impact investing isn’t a criteria but a style of investing or strategy. It focuses not on the financial benefit of investing in ESG priorities but instead invests to enact change, either environmental or social.
“I think what a lot of people don’t understand about ESG is it usually is really focused on looking at those environmental, social, and governance factors that are going to have a material financial effect on the company,” said Kim Griffin, member engagement director at Toniic. “So it’s really still rooted in looking at the financial impacts of the company, which may or may not meet expectations of investors who want to solve the climate crisis and have more flexibility on financial risk and financial return expectations.”
The Wide World of Funds
With the growth of ESG in the last couple of years, there is now a wide range of funds available for investors with various priorities and goals in investing sustainably. For investors focused on impact investing above all and seeking change, they can do that in ways that can provide returns these days.
“There are opportunities, certainly in the areas of climate, health, education, and elsewhere, where the opportunity sets are so large that there are commercial solutions that can really deliver at above-market-rate returns while having that tangible positive impact. But it’s not everything,” said Andrew Lee, managing director, and head of sustainable and impact investing at UBS. “There are some areas where you might have to take [a]longer time risk or perhaps the risk that the financial return won’t quite be there to really solve problems in certain geographies.”
Understanding the distinction between ESG and impact investing is an essential clarification for advisors to make with their clients to best guide them to the types of ESG funds that suit their long-term goals. State Street Global Advisors offers a variety of ESG funds with different investment strategies and plans, from the broadly investing SPDR S&P 500 ESG ETF (EFIV) to a governance-focused fund with the SPDR SSGA Gender Diversity Index ETF (SHE), or a fund that focuses on the clean energy technologies with the SPDR S&P Kensho Clean Power ETF (CNRG).
For more news, information, and strategy, visit the ESG Channel.