ESG Investing stands for Environment, Social and Governance. RI Investing stands for Responsible Investing. It is simply another term for ESG Investing that may not strictly observe all three of the ESG categories when investing.
So what is Impact Investing?
The focus of funds that are labelled Impact Investing is to invest only in things that are making a positive difference in the specific industries the fund notates as its focus. They have economic benefits alongside social or environmental outcomes. For example, an Impact fund might be solely focused on investing in businesses that serve or benefit from sustainable energy. Like ESG funds, they do not have to follow the UN mandated definition and process of ESG investing. There is also no legal or mandated commonly agreed definition of Impact Investing. Whilst ESG funds often ‘screen out’ certain areas of investment (e.g. alcohol or weapons), Impact funds have a usually narrower field to invest within as they stipulate only what they will invest in. They are usually purpose- driven. The term Impact Investing grew in awareness from around 2007, but the practice of investing this way began much earlier. Investing in areas such as health, agriculture or finance to directly assist people in developing nations is common. Maximising returns for a given level of risk is not the only objective of these funds unlike more mainstream funds. Put simply, when a non-financial restraint is placed upon a potential universe of investments, it is a strong possibility that the overall return investors earn may well be less than those funds without such additional restraint.
One might consider this a form of philanthropic support of a cause – but with profits as an aim as well.
In a recent UCLA study in the US the difference was circa 15% less of a median return for Impact Investing funds than broader active funds. Thus, for investors it is important you personally ‘buy into’ the cause of an Impact fund if you want one in your portfolio. This is because you could be faced with a lesser return on your capital invested. The causes are limited only by the imagination and the economics supporting it to make it worthwhile enough for investment. Additional examples include sustainable forestry, micro finance for emerging nations, pollution technology control and low emission transportation systems.
Why invest in Impact funds?
Well, you have probably already concluded correctly that it is the desire of an investor to direct part of their money to not just a worthy cause of interest to them, but to earn an economic return as well. Some large Kiwi Super funds (as an example) have their trustees mandating a certain percentage of the overall fund be in ESG or II funds. There is no reason why however an adviser would automatically include an ESG or Impact fund in their recommendations unless you have asked them to. Milestone Financial has compiled a quality list of investments in this area if you wish to learn more and indeed invest some of your money in this manner.
It is crucial you read the PDS of the fund (or ask your adviser) what the fund is allowed to invest in to understand exactly what the fund will/will not invest in. This should align with your values and beliefs No two ESG, RI or II funds are the same and nor are the ‘boundaries’ they set themselves to run by or invest in.