When discussing the subjects of environmental, social and governance (ESG) and impact investing, the conversation often turns to one of two widely held beliefs: first, that this field is still a niche, risky subsector of the investing universe, and second, that one has to give up returns to have a positive impact. We think those premises are fundamentally no longer true. ESG and impact investing has moved into the mainstream, and we believe that now is the time to rethink how we talk about the field.
ESG as Part of a Rigorous Investing Process
First, there is the concept that impact investing is a fringe or undisciplined practice. To the contrary, ESG and impact investing is just the opposite. Traditional investing and active management are extremely difficult, requiring robust processes, deep experience and expert teams. ESG and impact investing is, first and foremost, investing. Hence, they require the same processes and expertise as traditional investing, in addition to the added rigor and proficiency required to understand and embed true impact into the investment. When considering ESG and impact investing, investors should not throw conventional risk/return analysis to the wind: rather, they should assert investment rigor. Engaging in ESG and impact investing actually requires a rigorous investing process.
The Question of Returns
Second, there is the question of returns. Since inception, this space has been stigmatized by the assumption that investors are forced to concede returns to create positive impact. We do not believe it is necessary to concede returns. There are different impact investing opportunities—from private credit managers working to extend credit to underbanked populations, to active equity managers that use ESG integration as part of their risk management—that meet conventional risk/return hurdles while also having positive social and environmental impacts that are both measurable and intentional.
Where possible, an investor can find market-rate instruments to implement ESG and impact investing across a traditional portfolio, while saving philanthropic dollars for targeted, high-impact work. The key is to find the right tool for the right job, which effectively manifests in rigorous, market-rate impact investment strategies for a traditional investment portfolio. There are situations in which investors can choose to accept lower returns to have a very specific or deep impact with a given investment, but we recommend saving this risk capital for its highest use.
This is not the future of ESG and impact investing—it is the present. ESG and impact investing is not a niche field or philanthropic experiment, but an extension of traditional, rigorous investing with an additional focus on positive impact in the world. We believe true scale for this field will come when we marry the positive impacts of ESG and impact investing with the rigor and risk/return standards of conventional investing practices.
In an ultra-connected world where transparency is the norm, investors have begun to appreciate that compartmentalizing their values and investment decisions is no longer practical. As such, recent years have seen unprecedented interest and activity across the environmental, social and governance (ESG) & impact investing spectrum, with many investors facing greater pressure to align their investments with their values. The focus on ESG & impact investing should only intensify as views continue to evolve and the influence of the millennial generation increases.