Introduction to Impact Investing
Impact investing refers to not only focusing on the return of capital, but also actively incorporating measurable social, environmental and other impacts into the investment process. Impact investing involves social, environmental and other investment directions, so it is often mentioned together with ESG investing.
Impact investing has the following characteristics:
- Investors hope to introduce social and environmental impacts: in investment, investors not only focus on financial returns, but also hope to have a positive effect on society and the environment;
- Financial return is an indispensable part: although there are many overall goals, Impact investing has a positive financial return, which is consistent with the initial goal of investors;
- Influence can be measured: in investment, investors can pay attention to the performance indicators related to society and environment, so as to measure the effect of Impact investing and ensure the transparency and authenticity of information;
Difference between Impact Investing and ESG Investing
Although both impact investing and ESG investing involve social, environmental and other aspects, they still have certain differences:
- The purpose of impact investing is to create influence, so we take the initiative to pay attention to social, environmental, and other aspects that can have an impact. ESG investing is still a traditional investment strategy, and social, environmental and other aspects are only part of it;
- In terms of investment choices, impact investing will favor industries with positive externalities and give up some industries with negative influence. ESG investing hopes that companies in negative externalities can achieve positive effects on environment and society through their own efforts (such as energy conservation and emission reduction, technology upgrading, etc.), because they will invest in outstanding companies in negative externalities;
- In order to achieve influence, impact investing may actively choose some assets with low return on investment (although the actual return may be higher than the expected level), while ESG investing still establishes an investment structure to maximize financial return. To some extent, this can also explain why impact investing chooses assets with low theoretical return, but the actual return is higher than the expected level;
Regulation on Impact Investing
Although impact investing actively creates positive impact, it is still subject to regulatory influence. For example, the European Securities and Markets Authority (ESMA) requires in the fund naming rules issued in November 2022 that funds containing “impact investing” should comply with the relevant investment regulations of ESG, otherwise the similar name of “impact investment fund” cannot be used. In general, impact investment may be more regulated than traditional ESG investing.