When many investors first become aware of impact investing, they wonder if it is the same as Socially Responsible Investing. It is not. In this blog post, we seek to uncover the difference between impact investing and socially responsible investing.
So what is the difference between impact investing and socially responsible investing? Impact investing is distinctly different from socially responsible investing in that socially responsible investing typically applies a set of negative or positive screens to a group of publicly listed securities – for example, a mutual fund that avoids investments in tobacco, alcohol and firearms. Impact investing goes beyond a passive screen by actively seeking to invest in companies or projects that have the potential to create positive economic, social and/or environmental. Where socially responsible investing fund managers are generally passive and adopt a “do no harm” approach, impact investing funds typically not only seek to create positive impact, but measure and report their impact in a transparent way.
Beyond the impact investing objective, impact investing also typically targets progress on environmental, social and governance (ESG) matters relevant to a company’s strategy and operations. In impact investing the ESG analysis, which takes into account the effect that a company’s operations has on its market, community and environment, has become more mainstream in recent years, as analyses have determined that it can both drive long-term value and reduce brand and reputational risks. The UN Principles for Responsible Investment (like impact investing), which detail best practices in ESG investing, have been signed by nearly 700 investment managers and over 250 asset owners around the world, including Blackrock, Fidelity, KKR and CALPERS.
It is not enough for impact investing managers to merely intend to make a positive difference – managers and investors must track their social and environmental performance (the impact). In 2009, a group of impact investing stakeholders including investment managers, the Rockefeller Foundation, and the U.S. government, began to create a common set of social and environmental impact metrics that would increase the transparency and credibility of impact reporting. This led to the creation of the IRIS framework, which applies across sectors and geographies to give investors a standardized measure of the non-financial impact of their investments, ranging from average employee wages to metric tons of greenhouse gas offset. With leading impact investing funds and investors utilizing IRIS metrics to track and report their social and environmental results, investors will increasingly be able to compare and benchmark non-financial performance across managers and strategies.