The “Great Wealth Transfer” refers to the significant intergenerational transfer expected to occur as older generations pass their assets down to younger generations. In Australia alone, over the next 20 years, Generation X and Y are expected to inherit over $3.5 trillion.
This transfer of wealth presents a unique opportunity for impact investing to play a pivotal role in shaping the future of philanthropy, social change, and sustainable development.
So, what is Impact Investing, and how does it differ from ESG?
Impact investing and ESG (Environmental, Social, and Governance) investing are related but distinct approaches within the realm of responsible and sustainable investing. While they share some similarities, they focus on different aspects of investing and have different objectives. Here’s a breakdown of the critical differences between impact and ESG investing:
1. Focus and Objectives
- Impact Investing: The primary objective is to generate measurable positive social or environmental impact alongside financial returns. Impact investors actively seek out investments that can drive specific and quantifiable outcomes, such as poverty reduction, environmental conservation, or improved healthcare access.
- ESG Investing: primarily focuses on considering environmental, social, and governance factors in investment decision-making to assess companies’ overall sustainability and ethical behaviour. The goal is to integrate these factors to manage risks better, enhance long-term financial performance, and promote responsible corporate behaviour.
2. Intentionality
- Impact Investing: have a deliberate and intentional goal of generating a positive impact. They actively choose investments based on their alignment with specific social or environmental objectives.
- ESG Investing: ESG integration involves analyzing and assessing companies based on ESG criteria, but it doesn’t necessarily require the same level of intentionality in driving measurable impact. ESG investors may aim to mitigate risks and promote sustainability without necessarily seeking explicit impact outcomes.
3. Measurement and Reporting
- Impact Investing: Measurement and reporting are crucial components of impact investing. Investors strive to quantify their investments’ tangible social or environmental results and report on progress toward achieving their intended outcomes.
- ESG Investing: involves evaluating companies based on various ESG metrics and indicators, which can vary across different frameworks. Reporting typically involves disclosing ESG-related information to provide transparency to investors and stakeholders.
4. Investment Universe
- Impact Investing: can span a wide range of sectors and asset classes, including clean energy, healthcare, education, affordable housing, and more. The primary focus is on investments that generate specific positive outcomes.
- ESG Investing: considerations can be applied to a broader set of investment choices, including companies that may not be primarily focused on creating positive impact but are evaluated based on their ESG performance and behaviour.
5. Risk and Return
- Impact Investing: aim to achieve both financial returns and impact, but the emphasis on impact outcomes may mean that financial returns could vary depending on the specific investment and its objectives.
- ESG Investing: ESG integration is often viewed as a risk management strategy that seeks to identify potential risks and opportunities associated with environmental, social, and governance factors. The primary goal is to enhance long-term financial performance by making informed investment decisions.
Overall, impact investing will only increase as we see the wealth transfer from the patriarch to their children. As the next generation begins to understand how important their role can be in making a positive difference to the world. They can start to align their values with their financial goals.
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