Silva Hanell, Wealth Leader & Partner at Mercer Sweden
ESG and impact seek distinct outcomes, but their strategies can go hand-in–hand for investors wanting returns and societal benefits.
Environmental, Social and Governance considerations – ESG – have become core tenets of the financial industry over the past ten years. As these non-financial performance factors have become more commonplace in investment decisions, there has been a growing desire from investors to actually make a difference with their money.
Last year, The Economist released a scathing analysis of ESG frameworks and their outcomes, concluding that a misalignment between the asset management industry’s raison d'etre – to generate returns for its investors – and the profitability of ESG had, thus far, proven too big a bridge to cross.
You can’t improve what you can’t measure
It’s become clear over time that while a focus on ESG factors such as climate or diversity is a significant step in the right direction, it is not able nor necessarily even intended to guarantee both healthier societies and a more stable or equitable planet, at least not on its own.
Instead, some investors have turned their attention toward impact investing, where progress may feel more tangible progress can be made. Impact, particularly in private markets, offers investors the opportunity to be a more active investor than is typical and input into companies with targeted societally beneficial outputs. From this perspective, impact investing gives investors a seat at the table, access to specific challenges that are smaller and more solvable, and the chance to change companies from within in order to make those desired solutions happen.
How impact begins where ESG stops
Impact allows us to build on those foundations of ESG and have a more direct influence on chosen matters. It allows investors to guide companies through partnership rather than legislation and directives alone. Furthermore, impact investing exists to create greater alignment between companies and ESG issues, which in turn can help alleviate some of the in-built contradictions of outright returns versus societal considerations.
Making impact accessible
But from an investor’s perspective, how to integrate ESG and impact considerations into their strategy can be complex.
Impact investments have an accessibility issue, particularly for non-professional investors – Gen Zs, for example, appear keen to align their assets with their ethics – with fewer vehicles available within the marketplace. These investments often tend to be relatively illiquid, which compounds the issue further.
ESG is now more commonly integrated into funds whereas many impact-related funds are neither integrated into investment decisions nor are they commonly investable, or at least are not yet.
Furthermore, impact investing requires, at least at some level, interaction with firms from sectors such as energy and technology.
Impact investing provides investors a greater opportunity to help shift legacy practices in these areas, particularly in energy, toward a more sustainable, climate-positive arena.
Mercer was proud to be part of the panel Investing with Intent at Stockholm Climate Week 2023.
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Great article,
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Good to see incorporation of beliefs in climate resolutions
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interesting
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Great article! I'd be interested in learning more about how Gen Zs influence the impact investing landscape.