Understanding ESG and Impact Investing

Author: Nick D’Amico, CFP®, Manager, Advisory Services Group
07/27/2022

The popularity of ESG and Impact Investing continues to increase as clients look to invest in companies that are pursuing positive change, while also providing competitive returns. As more and more investors seek these types of strategies, demand has grown in recent years.

Investors put about four times more cash in ESG investments in 2020 than they did in 2019, according to a report published by the U.S. Forum for Sustainable and Responsible Investments. This same report showed that dedicated Impact Investing funds had grown from $502 billion in assets under management in 2019 to $751 billion in 2020.

While both ESG and Impact Investing are growing investment strategies, they are different. Oftentimes, investors don’t know the difference, but understanding how these strategies differ can help them make better investment decisions that allow them to live out their beliefs while pursuing their investment goals.

What is ESG Investing?

ESG investment strategies involve incorporating environmental, social, and governance factors into decisions throughout the investment life cycle. This entails looking at various companies’ ESG practices, including how they treat the environment and their employees, along with more traditional financial measures to assess potential return.

ESG funds tend to be in one of two categories: ESG risk mitigators or ESG opportunity seekers.

  • ESG Risk Mitigators: The ESG evaluation supplements traditional financial analysis by identifying a company’s ESG risks – basically what they stand to lose by not acting on ESG risks. This analysis is used to assess and manage risks during the due diligence process, as well as throughout ownership of the fund.
  • ESG Opportunity Seekers: The ESG evaluation supplements traditional financial analysis by identifying a company’s ESG opportunities – basically the money they stand to gain from seizing ESG opportunities. The fund manager proactively looks for investment opportunities that support ESG progress.

In both instances, financial returns remain the primary objective of ESG investing.

Impact Investing

Impact Investing involves making investments with the intent to produce a positive, measurable social or environmental benefit, along with a financial return. The outcomes produced are the primary objective, meaning the investments need to generate a tangible social good. Impact Investing goes beyond ESG investing in a number of ways. The following are criteria used to identify an investment strategy as impact investing:

  • Criteria for the Investor
    • The investor intends the impact: The particular outcomes expected to come about because of the investment must be clearly stated.
    • The investor contributes to the impact: This means that the investor must make a contribution – financial or nonfinancial – that directly contributes to helping achieve the intended outcome.
    • The investor measures the impact: The investor must put into place a system of measurement to link the investment to actual improvements in social or environmental outcomes.
  • Criteria for the Investment
    • The impact must materially advance progress toward meaningful social or environmental goals.
    • The intended impacts must be integral to the company’s business model. In other words, the impacts must be a core part of the business.

Incorporating ESG and Impact Investing in an Investor’s Portfolio

With increasing interest and activity in ESG and Impact Investing, investors are looking for ways to align their environmental, social, and governance interests and beliefs with their investments. And more solutions are available now as demand from investors for these types of strategies has increased.

A wide variety of equity and fixed income investments are available for investors interested in ESG investing – whether they want to avoid certain companies or sectors or seek out exposure to positive ESG characteristics. A number of Impact Investing funds are also available that allow people to invest in companies that are producing positive social or environmental outcomes, as well as offering some diversification to minimize risk.

For more information about ESG and Impact Investing strategies, contact your dedicated Financial Planning Consultant:

PCG West Coast: Joseph Turek (214) 859-5142
PCG Gulf Coast: David Pergande (214) 859-1479
Momentum Independent Network: Patrick Deist (214) 859-6036

To learn more about Momentum Independent Network, contact Wealth Management at WealthManagementInfo@hilltopsecurities.com or 833-4HILLTOP.

The paper/commentary was prepared by Momentum Independent Network (MIN). Momentum Independent Network Inc. is a registered broker-dealer and registered investment advisor that does not provide tax or legal advice. MIN and Hilltop Securities are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, TX 75201 (214) 859-1800, 833-4HILLTOP. Member FINRA/SIPC

For professional use only.

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