Impact investing is a growing sector within the broader sustainable finance ecosystem, but it is fundamentally distinct from ESG investing. Although often conflated, the two approaches are driven by different objectives, methodologies, and outcomes. This article explores the nature of impact investing, its defining characteristics, and how it diverges from ESG investing.

This article is written by Mourad Seghir ([email protected]). Mourad is part of RSM Netherlands Business Consulting Services with a specific focus on Finance & Strategy. 

Definition of Impact Investing

According to the Global Impact Investing Network (GIIN), impact investing refers to “investments with the intention to generate positive, measurable social and environmental impact alongside a financial return.” 

The primary goal of impact investing is to address some of the most pressing global challenges, including sustainable agriculture, renewable energy, conservation, microfinance, and basic services like housing, healthcare, and education. The GIIN identifies four core characteristics of impact investing:

  1. Intentionality: A clear intent to contribute to positive social or environmental impact through investments.
  2. Range of Return Expectations and Asset Classes: Impact investments can yield financial returns ranging from below market rate (concessionary) to market rate and span across asset classes including cash equivalents, fixed income, venture capital, and private equity.
  3. Investment with Return Expectations: Impact investments are expected to generate financial returns, at least ensuring the return of the invested capital.
  4. Impact Measurement and Management: A commitment to measuring and reporting the social and environmental performance of investments to ensure transparency and accountability.

The Difference Between Impact Investing and ESG Investing

While ESG investing and impact investing both fall under the broader umbrella of sustainable finance, they differ in terms of their objectives, focus, and practices.

ESG Investing

ESG investing focuses on integrating ESG factors into investment decisions, with the primary goal of improving risk-adjusted returns. It involves evaluating companies based on their environmental, social, and governance practices, and how these factors may affect financial performance. Strategies such as ESG screening, ESG integration, and thematic investing are designed to select investments that align with certain ESG criteria while targeting financial returns.

The primary motivation for ESG investing can vary from achieving financial value, regulatory obligations to reflecting personal or institutional values. Some investors are driven by non-pecuniary preferences (values), while others emphasize risk and return opportunities (value). A common point is that financial returns are often at the forefront of ESG investment decisions.

Impact Investing as Distinct from ESG

Impact investing is considered a niche within the sustainable finance ecosystem. It is primarily values-driven, aiming to create measurable, positive social or environmental outcomes that take precedence over financial return considerations. In contrast to ESG investing, impact investing places its core emphasis on values before value—impact goals are prioritized above financial returns.

To illustrate the distinction, we can draw a comparison between investing for impact and investing with impact. Investing for impact prioritizes social or environmental outcomes over financial returns. This approach is often linked to philanthropic foundations, which have traditionally engaged in impact investing as part of their mission. On the other hand, investing with impact considers impact considerations after financial return expectations, aligning more closely with traditional ESG considerations. This dual objective approach to impact investing, where both financial returns and positive social or environmental outcomes are important, sits somewhere between traditional philanthropy and mainstream ESG investing.

Impact Investing versus ESG 

Here is a table comparing the key differences between impact investing and ESG investing:


This table highlights how the key aspects of intent, values, measurement, scope, and risk-return differ between impact investing and ESG investing.

Impact Investing as Part of ESG Strategies

Though distinct, impact investing is considered a part of the larger spectrum of ESG investment strategies. There are seven main categories of ESG strategies:

  1. Norms-Based Screening: Investments are screened based on compliance with certain international standards or norms, often relating to human rights, environmental protection, and anti-corruption (values-driven).
  2. Exclusionary Screening: Negative screening to avoid investments in specific sectors, companies, or activities not aligned with certain ESG criteria.
  3. ESG Integration: The systematic inclusion of ESG factors into financial analysis and investment decision-making.
  4. Thematic Investing: Targeting themes such as climate change, renewable energy, or water conservation.
  5. Corporate Engagement and Shareholder Action: Using shareholder influence to promote better ESG practices in investee companies.
  6. Best-in-Class Selection: Investing in companies with the best ESG performance within a sector or industry.
  7. Impact Investing: Investing in projects, companies, or funds specifically to generate measurable positive social and environmental impact.

Impact Investing and Values Strategy

Within the scope of ESG, impact investing aligns closely with what is known as the "values strategy." This strategy is based on adhering to ethical norms or values that shape investment decisions. The values strategy emphasizes the social and environmental outcomes of investments and seeks to ensure that investments do not contradict the values of the investor. Impact investing stands out as a leading example of the values strategy in action, focusing on tangible outcomes and adherence to specific ethical principles or global objectives like the SDGs.

Thought Leadership: Value Versus Values

In sustainable finance, there is a crucial distinction between "value" and "values." Some investors make ESG decisions based on their values, allowing ethical beliefs and preferences to guide their investment choices, even if it means compromising financial returns with a fundamental believe in mind (e.g. green companies will become the new norm in the future for EU as depicted in my previous article: The Future of Europe's Economy: What Should You Know?). Others are motivated by value, focusing on how ESG considerations can improve a firm's risk and return profile and enhance financial performance.

Values-driven investors prioritize ethical beliefs and social justice concerns when making ESG investment decisions. The focus is on contributing to societal or environmental change, with financial returns often secondary to impact or with a long term believe. Principles like environmental conservation, corporate accountability, and social equity shape the investment strategy. This leads to practices like norms-based screening and exclusionary screening—avoiding investments in sectors not aligned with ethical values (e.g., fossil fuels, tobacco based on the belief that these businesses will fail on the long term). Moreover, impact investing is a prominent form of values-driven investing, where the goal is to achieve measurable social or environmental outcomes alongside financial returns.

In contrast, value-driven investors incorporate ESG factors to enhance a firm’s risk-return profile and generate better financial performance. The emphasis is on identifying sustainable business practices that contribute to long-term profitability. These investors systematically use ESG integration—including ESG factors in investment analysis to improve returns—and often participate in thematic investing to capitalize on sustainable market trends (e.g., renewable energy, waste management). Here, ESG is seen as a tool for risk management and value creation, not necessarily for achieving social or environmental goals.

Many investors blend both values and value in their approach, seeking opportunities that provide financial returns while aligning with ethical beliefs. This blended approach creates a spectrum, leading to diverse strategies within sustainable finance:

  • Double Bottom Line: Targets both financial returns and positive social/environmental impact. Investors look for opportunities where profits and ethical principles coexist without compromising either goal.
  • ESG Engagement: Investors actively engage with portfolio companies to promote better ESG practices. This strategy combines a drive for long-term value with the desire to influence corporate behaviour positively.
  • Thematic Investing with a Purpose: Investing in themes like gender equality or sustainable agriculture, balancing growth potential with alignment to broader societal objectives.

The interplay between value and values creates a dynamic continuum in sustainable finance. Factors influencing where investors fall on this spectrum include:

  • Investor Mandates and Preferences: Some investors, like pension funds, may have mandates requiring ESG alignment based on their beneficiaries’ values. Others, like asset managers, focus on risk management, aligning them closer to a value-driven approach.
  • Market and Regulatory Drivers: Regulatory developments (e.g., ESG disclosures, climate risk regulation) can drive value-focused investors to integrate ESG considerations, potentially bringing them closer to a values perspective.
  • Materiality of ESG Issues: In certain sectors, such as fossil fuels, ESG issues can significantly impact financial outcomes, blurring the line between value and values. For others, investors may weigh ethical preferences more carefully against financial implications.

The blending of value and values is driving integrated investment approaches that balance financial objectives with positive impact. While these approaches can create synergies, they also present challenges. For instance, trade-offs may arise when values-driven decisions conflict with financial goals, or when defining and measuring social/environmental impact proves difficult.

Ultimately, the sustainable finance landscape is shaped by the diverse motivations of investors, from those prioritizing measurable social and environmental outcomes to those seeking financial returns enhanced by ESG considerations. The balance between value and values makes sustainable investing a nuanced and comprehensive approach that is evolving to meet the complex needs of modern finance.

Conclusion

Impact investing represents a distinct and meaningful part of the sustainable finance ecosystem. It is driven by the desire to achieve measurable positive impact on society and the environment while also generating financial returns. While ESG investing emphasizes risk and return opportunities and how ESG factors can enhance financial value, impact investing prioritizes values and long-term outcomes that address pressing social and environmental challenges. 

Despite their differences, both approaches contribute to the overall landscape of sustainable investing, each offering a unique approach to creating a more sustainable and equitable world.

RSM is thought Leader in the field of Strategy and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.