Responsible investing, sustainable investing, ethical investing, socially responsible investing (SRI), ESG (environmental, social, governance) investing, mission-driven investing, thematic investing, impact investing—social consciousness has found its way into the financial markets, but it’s come with a sudden explosion of vocabulary. These overlapping terms raise a question: should we be careful to use them distinctly? Or would a rose by another other name smell as sweet?
The truth is that, in practice, these words and phrases are often confused or used interchangeably, which is why, as an investor, it’s important to ask questions about any investment products and consistently clarify things you don’t understand.
Here at World Vision Canada, we’re focused on impact investing. Impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” For impact investments to work, social impacts must be tracked just as rigorously as financial performance. And in our case, if an investment doesn’t result in a positive social outcome, we don’t consider it successful, even if it provides a return on investment.
Right now, impact investing products for the everyday person (“retail investors”) are relatively difficult to find in Canada. Even if your financial advisor’s firm offers “responsible” or “ethical” funds, these are ultimately different sorts of investments.
The first way they’re different is that ESG investments are usually a way of approaching investment in public markets; impact investment funds, like ours, are generally smaller and don’t invest in publicly-traded companies. ESG investors’ primary motivation is to either increase the return on—or reduce the risk of—an investment, by taking into account non-financial factors (environmental, social and corporate governance factors) that could affect a company’s stock price. And because many ESG investors are large pension funds and other institutions, they often wield significant clout, and can engage in dialogue (“shareholder engagement”) with major corporations the way others can’t.
Those who engage in SRI (socially responsible investing), meanwhile, typically make investment decisions that are more intentionally aligned with their values. While an ESG investor considers how ESG factors will affect a company’s stock price, an SRI investor considers what positive or negative impacts a company’s activities will have on its community and the world at large. SRI investors often use “positive screens” or “negative screens” to either invest in companies that meet certain criteria or, the opposite, withhold investment from companies that engage in unsustainable or unethical business practices (these criteria vary, with some investors refusing to invest in munitions manufacturers, and others deliberating divesting from fossil fuels, tobacco, gambling or alcohol-related enterprises). SRI investors may also use shareholder engagement strategies and make “thematic investments” in a certain area or industry, such as investments in clean technology or alternative energy.
While these approaches are extremely valuable, they are limited to existing public market investments—that is to say, traditional businesses that serve our traditional needs, from manufacturing our clothes to disposing of our waste to building the components in our phones. Meanwhile, impact investments are usually in new businesses, which have emerged with the intention to make a positive impact on the world. Put another way, impact investing takes SRI a step further, by investing in enterprises or funds that are actively focused on making the world better.
Another key way that impact investing is unique is its emphasis on the fastidious measurement and analysis of social impacts. Investors in our Small and Growing Business Bond, for example, receive quarterly impact statements and a review of the bond’s impact in our annual report. With some impact investments, social impact bonds for example, investors don’t receive a return unless some kind of social good is achieved.
As more people look at their investments as part of a legacy, as an expression of values, the industry will mature and evolve. But with over $2 trillion in responsible investments in Canada, and a growing number of impact investments actively addressing dire social problems, it’s clear that these concepts are already part of a rich and evolving culture of sustainable finance.