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What’s on the menu – ESG or Impact Investing?

August 7, 2023 - In the realm of investments, traditionally governed by numerical values and bottom lines, ESG and Impact Investing introduce a remarkably human-oriented dimension to the process. But the terms ESG and Impact have been used interchangeably so often that you can be forgiven for thinking of these two strategies as the same thing. But it’s not. That would be like thinking of chicken or beef on a menu as the same thing. They are both proteins and have certain similar components but offer different experiences and benefits to the eater. Likewise, ESG and Impact Investing are both found on the sustainable investing menu, but as investment strategies go, they each have their own objectives and investment outcomes. Understanding the difference and the consequential significance on your investment portfolio is essential. 

ESG and Impact Investing continue to gain momentum, particularly in alternative investments. The IFC forecasts that ESG-related investing will reach $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management. And it projects that impact-related investments could reach $26 trillion by 2030, making up 10% of global financial assets then. 

ESG and Impact investing both strive for positive contributions but they cater to different intentions in the investment portfolio. 

ESG investing, focusing on Environmental, Social, and Governance criteria, operates similarly to a comprehensive 

health check for businesses, meticulously scanning for potential risks and opportunities. This approach highlights potential environmental, social, and governance risks, much like a health check reveals potential health issues, pre-empting concerns before they escalate. Integrating ESG factors into investment decision-making and management serves as a benchmark for risk assessment. This systematic methodology helps an organisation’s management evaluate issues ranging from environmental pollution and worker safety to client data protection, ensuring a robust, sustainable, and ethically sound operation - much like a health check assures individual well-being.

On the other hand, Impact Investing entails an investment manager methodically identifying companies that can provide measurable solutions to global issues as defined by the United Nations Sustainable Development Goals. In this strategy, commonly employed in private markets like private equity, the investment manager becomes a company’s personal trainer who assists the company in delivering a measurable impact alongside financial growth. It involves the deliberate selection of assets for impact, a contribution to the investee firm’s impact, and an unbiased measurement of the said impact.

At Summit Africa, we proudly align ourselves with the Operating Principles for Impact Management (OPIM). These guidelines offer a precise framework to evaluate and measure our investments’ impact to ensure a contribution to social and environmental outcomes. Each evaluation uses an appropriate results measurement framework to answer essential questions: What is the intended impact? Who benefits from it? How significant is the intended impact?

When directly compared, ESG is a framework that often references the past to mitigate risks and or find opportunities and is subject to fiduciary scrutiny. In contrast, Impact Investing is predominantly a forward-looking strategy. It creates measurable impact opportunities and addresses risks but does not undergo the same fiduciary scrutiny as ESG. To sum it up, all impact funds adhere to ESG, but not all ESG funds focus on impact.

Appreciating the difference between ESG and Impact Investing is like distinguishing between beef and chicken. It equips you with the knowledge to make informed decisions to satisfy your specific investment appetite. So, the next time you’re perusing the investment menu, keep this in mind: ESG is your annual health check, and Impact Investing is your personal trainer. 

At Summit Africa, we acknowledge the significance of both strategies and are committed to integrating them into our investment decisions to foster positive societal and environmental impacts. Remember, all impact funds comply with ESG, but not all ESG funds concentrate on impact.

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