ESG investing and impact investing each refer to investment strategies that seek to address environmental and social considerations as part of the investment strategy. In general, “ESG investing” refers to the investment process, where an investor seeks to identify and mitigate environmental, social, and governance risks in relation to their portfolio companies. “Impact investing” generally applies to the investment focus – where the goal is to generate certain environmental or social outcomes, alongside a financial return.
ESG investing can be thought of as the process and policies through which an investor integrates an environmental, social, and governance assessment throughout its investment lifecycle – from sourcing, diligence, management, and exit. ESG investing does not necessarily suggest certain outcomes but seeks to address risks and alleviate negative outcomes. While traditionally a later stage investment practice, early-stage investors are increasingly developing ESG strategies, recognizing that ESG considerations are meaningful parts of company activities, and effective ESG strategies may both increase value and mitigate risk.[1]
Since impact investing is focused on generating target environmental or social outcomes, effective impact investing also requires discrete and measurable non-financial targets, integrated into the investment process. Just as ESG investing can be applied to a range of asset classes, impact investing can also be applied to different strategies and target outcomes.[2]
[1] More information about ESG integration for an early-stage investor is available at 500 Startups ESG Resources (https://500.co/esg).
[2] More information about impact investing is available at the Global Impact Investing Network (https://thegiin.org/impact-investing/) and ImpactAlpha (https://impactalpha.com/catalyzing-new-markets-with-early-stage-impact-investments/).