Impact investing vs sustainable investing: What are the key differences?

Emma Montocchio, Head of Impact Investments at Decusatio

Impact investing: Intention and measurement of impact

Impact investing is characterised by its explicit intention to generate positive, measurable social and environmental impacts alongside financial returns. This approach is proactive and mission-driven, focusing on solving specific global challenges such as poverty, access to education or climate change. Investors in this space often seek opportunities that address pressing issues through innovative solutions.

For example, an impact investor might fund a social enterprise that provides affordable clean energy solutions to underserved communities. The primary goal here is not just the financial return but also the tangible impact on improving lives and mitigating environmental degradation.

To ensure the effective management of these investments, measurement and reporting of the impact of these projects are crucial, ensuring that the investments are indeed achieving the desired outcomes.

Sustainable investing: Integrating ESG factors

Sustainable investing, on the other hand, integrates environmental, social, and governance (ESG) factors into the investment process to generate long-term financial returns while promoting sustainable practices. This approach is more about incorporating a broader view of risk management and value creation, ensuring that the companies and projects invested in operate responsibly and contribute to a sustainable future.

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Sustainable investments might target companies with strong ESG practices that reduce their carbon footprint, promote diversity and inclusion, or maintain high governance standards. While these investments aim to achieve positive social and environmental outcomes, the primary driver remains financial performance, with sustainability serving as a means to enhance long-term returns and reduce risks.

Comparing the two approaches

The key difference between impact investing and sustainable investing lies in their primary objectives and the role of financial returns in their strategies.

Impact investing: The primary goal is to achieve a specific social or environmental impact. Financial returns are important but secondary to the mission of creating positive change. Investors actively seek and prioritise opportunities that can demonstrate measurable impact outcomes.

Sustainable investing: The primary goal is to achieve financial returns while incorporating ESG considerations. This approach emphasises long-term value creation and risk mitigation through responsible investment practices. The positive social and environmental outcomes are seen as complementary to the financial objectives.

Overlap and practical implications

Despite their differences, there is considerable overlap between the two approaches. Many investment opportunities can appeal to both impact and sustainable investors, albeit for different reasons. For instance, investing in renewable energy projects like solar or wind farms can be seen through both lenses:

• An impact investor might focus on the direct environmental benefits and the contribution to mitigating climate change.
  
• A sustainable investor might emphasise the long-term financial viability and risk reduction associated with transitioning to clean energy.

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Both approaches are essential in the broader effort to promote sustainable development and address global challenges. They represent complementary strategies within the spectrum of responsible investing, offering various pathways for investors to align their financial goals with their values.

Insights from industry leaders

Insights for this article were taken from the video interview entitled "What is Impact Investing vs. Sustainable Investing?" featuring Sonja Saunderson, chief investment officer at EPPF (Eskom Pension and Provident Fund), on 16 May 2024. In this interview, Saunderson discusses the distinctions between impact investing and sustainable investing, providing further context and examples that enrich the understanding of these two strategies in the financial landscape. Watch the full interview presented by EBnet (The Employee Benefits Network) below:

As the head of Impact Investments at Decusatio, it is crucial to understand these nuances and communicate them effectively to our stakeholders. Whether investors are aiming for measurable impact or integrating ESG factors for long-term returns.