Impact vs ESG investing: Which is “right” for you?

The trend for wanting your money to have a positive effect on the world when you invest has been growing. If it’s something you’ve considered, the terminology might seem confusing with phrases like “ESG investing” and “impact investing” used interchangeably.

Read on to discover what the difference is and how it might affect your investment decisions.

ESG and impact investing share similarities but take different approaches

ESG investing incorporates environmental, social, and governance factors

When you’re making investment decisions using ESG criteria, you’ll consider environmental, social, and governance factors. You might look at a company’s ESG performance. You’d then incorporate these factors into your usual decision-making process. As a result, it may be a useful way to identify businesses that have good ESG practices.

With this information, you might decide to avoid investing in certain companies because their ESG performance doesn’t align with your views, or focus your investments on those that do.

Impact investments aim to have a measurable social or environmental impact

The Global Impact Investing Network defines impact investing as “investments made with the intention to generate positive, measurable social and/or environmental impact alongside financial return”. Impact investors might target specific sectors or issues that are important to them.

As you can see, while both ESG and impact investing have similar aims, the approaches are different.

In both cases, investors aim to make their values part of their decision-making when deciding how to invest and consider the long-term opportunities and risks. However, impact investing requires investors to measure the impact of their investments.

For example, if climate change is an important issue to you, when you’re taking an ESG investing approach, you might assess a company’s carbon emissions and the steps they’re taking to reduce them. This could lead to you excluding certain businesses from your investment portfolio, such as fossil fuel companies.

Now, if you took an impact investing approach, you’d search for companies that are having a measurable impact on reducing climate change risks, such as firms operating in clean energy or carbon capture technology.

There are ESG and impact investment funds available to choose from. A fund will pool your money with that of other investors to invest in businesses that meet the fund’s criteria. So, you can still incorporate ESG or impact investing values if you prefer to take a hands-off approach. 

Should you choose ESG or impact investing?

There’s no right or wrong answer when you’re deciding between ESG and impact investing – it will depend on your preferences and personal values.

Some investors prefer integrating ESG investing into their existing portfolio. For others, impact investing might allow them to focus on key issues that are important to them. You might even decide to incorporate both ESG and impact investing principles into different parts of your portfolio.

If you’d like to discuss which option is right for you, please get in touch. We’ll take the time to understand your priorities and offer tailored advice that considers your values and goals.

It’s still important to consider your personal investment goals and risk profile

Whichever option you choose, if you want to incorporate your values into your investments, it’s still important to consider your circumstances. For example, you may consider your:

· Investment goals: While you might want to have a positive impact on the world through your investments, your personal goals are still important – what is your reason for investing? Whether you want to retire early or support loved ones, your answer will often affect investment decisions, including how much risk to take.

· Investment time frame: With a goal defined, you should have a clearer idea about how long your money will be invested. Typically, you should invest with a long-term time frame of at least five years. Your time frame might also affect your risk profile.

· Risk profile: All investments carry some risk, but it varies between opportunities. So, it’s important to understand what level of risk is appropriate for you. Several factors may influence your risk profile, including your goals, investment time frame and how comfortable you are with risk. As financial planners, we could help you understand your risk profile.

· Diversification: Creating a balanced portfolio could reduce how much volatility you experience by investing in a wide range of sectors or geographical locations.

Making your investment decisions part of your wider financial plan could help you make decisions that are right for you and your aspirations.

Contact us to talk about your investment portfolio

If you want your investment portfolio to reflect your wishes and have a positive impact on the world, please contact us. We could help you balance your values with your financial goals to ensure your portfolio continues to reflect your circumstances and risk profile.

Please note:

This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.