Last update: 17.09.2024 08:32
Would you like to invest your money sustainably, but are unsure whether sustainable investing with ESG criteria or impact investing is right for you? Discover the key differences between ESG investing and impact investing and then decide which suits you better.
The world of financial investments has changed dramatically in recent years. More and more investors are interested in sustainable investing. They want to invest their money in companies that not only generate financial returns, but also have a positive impact on the environment and society. Two approaches are repeatedly mentioned in this context: sustainable investing with ESG and impact investing. But what do these terms actually mean and what are the differences?
Sustainable investing according to ESG criteria
At the beginning of 2005, the then Secretary-General of the United Nations, Kofi Annan, invited a group of large institutional investors. His aim was for them to participate in a process to develop principlesfor responsible investment(Process for Responsible Investing). A Swiss national, Ivo Knoepfel, actually invented the term ESG in 2004 😉 He produced the study “Who Cares Wins” on behalf of the United Nations This was the first time the acronym ESG was used. ESG stands for “Environmental, Social and Corporate Governance”.
ESG investing therefore incorporates environmental, social and corporate governance aspects into the investment process. The aim is to reduce risks in financial investments and optimize financial performance. ESG investments aim to achieve a return in line with the market and merely try to avoid negative effects.
Investing for a better world: impact investing
Impact investing goes one step further than ESG investing. The intention here is to make a positive contribution to solving environmental or social problems in addition to generating a financial return. This means that investments are made in companies, organizations, projects and funds that work directly on solving such problems. With impact investments, measurable social or ecological goals are the top priority and the return is secondary. The Global Impact Investing Network(GIIN) therefore states that impact investments must meet four requirements:
- Intentionality: You want your investment to have a positive social or environmental impact.
- Expected return: With an impact investment, you are basically aiming for a positive financial return or at least a return of capital. It is not about “doing good” or philanthropy. Depending on the strategy and investment, the expected return ranges from a return below the market level to returns in line with the market or asset class.
- Traceability: You want the effects of your investment to be recorded using measurable criteria and documented transparently.
- Additionality: You expect the effect achieved to be significant and convincingly demonstrated.
Beware of greenwashing with sustainable financial products
Greenwashing is a term used when companies or financial investments present themselves as more environmentally friendly or socially responsible than they actually are.
There is often a misconception that taking ESG criteria into account contributes to sustainability goals. However, this is not the case with most ESG investments. There is a difference between whether you “only” want your investment to be compatible (“aligned”) with climate targets and whether you want to make an additional contribution (“impact”) to achieving sustainability goals.
In its report on greenwashing in the financial sector at the end of 2022, the Federal Council clarified that financial products that only reduce ESG risks pursue a purely financial investment objective and should not be labeled as sustainable. A product that is intended to contribute to the implementation of a sustainability objective generally uses an impact investing approach and/or a credible active ownership approach.
That’s why you should always ask yourself the following question when making sustainable investments: What goal am I pursuing with the portfolio or investment product? Do I want to invest my money in a way that has a real, positive impact on the climate or do I just want to reduce sustainability risks?
With Inyova you can implement impact investing in pillar 3a
Inyova 3a is made for everyone who wants to do something good with their money and, above all, with their retirement provision. Our customers are primarily people for whom sustainability in their private lives is important and who also want a sustainable option for their money – without greenwashing. You can find out more in this article.
With the promo code SMOLIO you pay no fees for 12 months. Simply enter it under “Promotions” when you open your pillar 3a or Inyova Invest account before you deposit money.
Addendum 3.12.2023 Limited-time promotion: Inyova will give you a bonus if you invest with them by 31.1.2024. The more you invest, the higher the bonus – up to CHF 250 for investments over CHF 50,000. For example, if you deposit or transfer 5,000 francs, you will receive 25 francs in your bank account at the end of the campaign. And as always, if you want to benefit from the tax advantages for 2023, your money must reach Inyova by 27.12.2023.
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Impact investing does not necessarily have to cost returns
ESG investments aim to achieve a return at market level and merely try to avoid negative effects. Such effects can occur, for example, if companies are negatively affected by climate change or do not comply with social standards.
In contrast, impact investments prioritize measurable social or environmental goals and the return is secondary. This can mean that impact investments specifically support companies that are committed to clean energy, sustainable agriculture or public services such as health and education. However, impact investing does not necessarily have to cost a return.
The latest (and annually updated) study by the Global Impact Investing Network shows that the vast majority of impact investors (74%) aim for risk-adjusted market returns. This includes 9 out of 10 institutional investors and 8 out of 10 asset managers. The remaining investors are satisfied with returns below the market return (14%) or with capital-preserving returns (12%).
And what about effective performance? The more than 300 investment professionals also report on this. Most (79%) report that their impact investments performed financially as expected or even better. Nine out of ten investors also estimate that the intended impact was achieved or exceeded.
The study therefore refutes the widespread view that impact investing necessarily costs returns.
Summary Impact investing or sustainable investing with ESG
ESG and impact investing are two different forms of sustainable investing, but they have different goals and impacts. While sustainable investing with ESG primarily aims to reduce risks for your financial investments, impact investing aims to achieve an environmental and/or social impact in addition to financial returns. It is important to be aware of these differences and to compare them with your own motivations for sustainable investing. In this way, you avoid disappointment, become clear about your own expectations of sustainability in the portfolio and can implement them accordingly.
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