ESG as a Driving Force for Impact Investments

ESG considerations are becoming more and more a core component for investment decisions. Generally speaking, sustainable investment factors in ESG criteria in portfolio selection and management. At a very basic level, sustainable investments are frequently determined by excluding investments in industries that imply negative consequences (e.g., tobacco, oil&gas, weapons). As of 2020, sustainable investment makes up roughly a third of all Assets Under Management (AUM).

A refined version of sustainable investment is impact investing that requires three main characteristics that differentiate it from sustainable investments, in accordance with the framework provided by the Global Impact Investing Network (GIIN): intentionality, additionality, and impact measurement. Intentionality requires the will of the investor to contribute to generating a positive environmental or social benefit, such as combating climate change. Additionality measures the contribution of the investment, it requests to understand what would have happened if the investment would not have been done; for example in a market unlikely to obtain financing, as in certain developing countries. Finally, impact measurement requires evaluating the externalities generated by the investment (e.g., CO2 emissions avoided). In essence, sustainable investment frequently only focuses on financial performance whereas impact investments require defining well the social and environmental benefits obtained. Nevertheless, the difficulty in tracking “impact” must be recognized.

Despite the significant increase in interest around impact investing, it still represents a small proportion compared to sustainable investments. A report presented in 2020 estimates the current market size at USD 715 billion. In the same year, global sustainable investments reached USD 35.3 trillion.