Ethical, ESG & Impact Investing – What’s The Difference?

Ethical investing, ESG (environmental, social, and governance) investing, and impact investing are all investment strategies that focus on aligning an investor’s values with their investment decisions. While these strategies have some similarities, there are also some key differences that are worth considering.

Ethical investing involves choosing investments that align with an investor’s moral or ethical principles. This can include avoiding investments in companies that engage in activities that are considered harmful or unethical, such as companies that produce tobacco products or those that have poor environmental records. Ethical investors may also seek out investments in companies that have a positive impact on society, such as those that promote diversity and inclusion or those that support sustainable development.

ESG investing is a similar strategy that focuses on investing in companies that have strong environmental, social, and governance practices. This type of investing typically involves evaluating a company’s performance in these areas and using that information to make investment decisions. For example, an ESG investor may choose to invest in companies that have a strong track record of reducing their carbon emissions or those that have a diverse and inclusive workplace.

Impact investing is a more focused approach that involves investing in companies, organisations, and funds that have the specific goal of generating a positive social or environmental impact. This can include investments in renewable energy, affordable housing, or micro-finance institutions, among others. Impact investors typically seek to measure and evaluate the social and environmental impact of their investments, and may use this information to guide their investment decisions.

One of the key differences between these strategies is the degree of focus on generating a positive impact. While ethical and ESG investing may consider a company’s impact on society and the environment, the primary focus is on aligning with the investor’s values and avoiding investments in companies that engage in harmful or unethical activities. In contrast, impact investing has a more explicit focus on generating a positive impact, and the investor’s values are often secondary to the investment’s potential to create social or environmental change.

Another key difference is the degree of subjectivity in the investment decision-making process. Ethical and ESG investing can be somewhat subjective, as different investors may have different values and may therefore make different investment decisions. Impact investing, on the other hand, often involves more objective criteria for evaluating an investment’s potential impact, such as the number of people who will benefit from the investment or the amount of carbon emissions that will be reduced.

From a financial perspective, impact investing can also offer some potential benefits over ethical and ESG investing. For example, because impact investments are focused on generating a specific social or environmental impact, they may be less vulnerable to market volatility and other economic factors that can affect traditional investments. This can provide investors with a more stable and predictable return on their investment.

Additionally, impact investing can provide investors with the opportunity to support causes that they care about and to make a positive difference in the world. This can be a powerful motivator for some investors and can provide a sense of fulfilment and satisfaction that may not be present in other types of investing.

Ethical, ESG, and impact investing are all investment strategies that seek to align an investor’s values with their investment decisions. While these strategies have some similarities, they also have some key differences, including the degree of focus on generating a positive impact and the subjectivity of the investment decision-making process. Impact investing, in particular, offers the potential benefits of more stable returns and the ability to support causes that investors care about.

Find out more about why we focus on Impact Investing here at BlueSphere by speaking with one of our advisers.