Impact Investing 101
What does impact investing mean?
The business of sustainability and investing can be fuzzy and confusing. So defining the various terms is crucial. In the interest of setting the stage and a little self-education, here’s the various terminologies and relevant bodies one comes to encounter within the realm of sustainable investments.
Terminologies
Responsible Investment . According to UNPRI, “Responsible investment is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.” In other words, responsible investment can be pursued with only financial return in mind. Investors don’t need to have an intent to make a positive environmental or social change. But they should incorporate material ESG information, regardless of sector or company mission, into their decision-making because it can have a significant effect on investment performance.
Socially Responsible Investment. SRI, on the other hand, is simply an umbrella term used to describe similar concepts such as ethical investment, green investment, sustainable investment and impact investing. These approaches seek to earn a financial as well as environmental and/or social return. SRI can also mean incorporating ESG criteria in to the decision-making process.
ESG. Some examples of environmental, social and governance (ESG) factors include:
Impact Investing. Investors use SRI or ESG to exclude certain types of companies or sectors, or select companies with an operating model that mitigates certain risk factors. The main difference between SRI or ESG and impact investing is that the latter specifically seeks to solve environmental or social issues faced by communities around the world. According to GIIN, “impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.”
SDGs. The Sustainable Development Goals or SDGs are a set of 17 goals covering poverty, civic society and environment that the United Nations has targeted for communities to achieve by 2030. Investors can directly contribute toward many of these goals that are investable, thus making an impact through their investments.
Organizations
PRI. The Principles for Responsible Investment is “a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.” It is sponsored by the United Nations and has more than 1,800 signatories, from over 50 countries, representing approximately US$70 trillion.
GIIN. The Global Impact Investing Network is a leading non-profit organization in the U.S. that facilitates knowledge sharing, promotes principles and ideas and provides resources to the impact investing community.
BCorp. In their own words, “B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk.”
US SIF. A leading forum that promotes investor communication, education and research in SRI.
GRI. The Global Reporting Initiative is a international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption.
Measurement
IRIS. Developed by GIIN, the Impact Reporting and Investment Standards is a project that aims to standardize the measurement of impact investing.
GIIRs. The Global Investment Investing Ratings is an assessment platform for measuring the environmental and social performance of companies and funds.
Pulse. A portfolio management tool for analyzing companies. It comes preloaded with IRIS metrics.
Impact Investing Networking Map. A tracking tool developed by the Case Foundation, ImpactSpace and Crunchbase with the aim to improve transparency and accountability among impact investors.
