Wait...If all investments have impact, then why is impact investment different?
(And also, “How much wood could a woodchuck chuck if a woodchuck could chuck wood?”)
In a recent MIT article, impact investing is defined as “the practice of investing in companies, organizations, and funds with the intention of generating not just financial returns, but measurable social and environmental impact as well.”
While impact investing has been around in various forms for several decades, it is quickly moving into the mainstream investor’s toolkit.
Back in the day, it was SRI, or Socially Responsible Investment, and it was about negative screening, or eliminating stocks such as cigarettes, alcohol, and firearms from investment portfolios. But some data showed that these approaches limited financial returns.
Today, we’re in the realm of ESG, or Environment, Social, and Governance criteria. It’s also known as Responsible Investment and a host of other terms that make your head spin.
Here are three reasons why impact investing is hot right now:
1. More data now shows reduced risks and potential financial outperformance
As you’ve heard before…
"In God we trust, all others must bring data." (Edwards Deming, the father of modern quality management)
Investors, analysts, and fiduciaries need good data to make informed investment decisions.
Here are trusted sources of the increasing body of evidence linking ESG, in its various forms, to reduce risks and achieve equal or better financial returns.
(Note that many would consider impact investing to be different from ESG investing.)
Examples in this category abound. Consider just two:
The CDP (fka, Carbon Disclosure Project) represents 500+ investors managing $95+ trillion in assets, and asks the world’s largest 7,000 companies each year what they’re doing regarding climate change risks and opportunities (learn more).
The Investor Agenda represents 450+ investors representing$34+ trillion in assets under management, and encourages the world’s governments to be more aggressive in addressing climate change (learn more).