There is ongoing confusion about how 'Impact Investing' and 'ESG Investing' overlap. It is understandable because the line between the two approaches is less clear than one might think.
Traditionally, the notion of Impact Investing was associated with investments in smaller privately-owned or community-based enterprises looking to address specific social or environmental problems. Examples include funds that invest in early-stage enterprises bringing technology to underserved populations, social housing, social impact bonds, or microfinance. Impact has always been about intentionality, investing to generate a positive, measurable social or environmental difference.
On the other hand, ESG integration is traditionally seen as the systematic analysis of environmental, social and governance factors, alongside financial factors in security selection. Unlike Impact, which was associated with private markets, ESG was initially and most often associated with the public equity space.
But the concepts of Impact and ESG integration collide, or more appropriately said, can be holistically combined, even in the public equity space. While impact is typically associated with a particular product or service and a specific environmental or social goal, it is, broadly speaking, about achieving positive outcomes. ESG integration is used as a tool to systematically identify those companies that outperform on a broad range of environmental, social and governance factors. This outperformance is associated with risk mitigation and higher risk-adjusted returns, but also strong stakeholder focus and the large scale impact these companies make.
At Honeytree, we believe true system wide impact comes when companies focus on responsible growth in all parts of their businesses and in support of all stakeholders. It is not enough for a company that produces electric cars, contributing positively in the fight against climate change, to also have dubious or exploitative employment practices. Our investment process identifies those companies where long term financial success is inextricably linked to making a direct positive impact on communities, employees, supply chains, customers and competitors.
The companies we invest in are focused on entire systems change - a full embrace of stakeholder driven governance driven by their purpose. Focusing on responsible growth allows us to identify the leaders of this system wide change, making large scale impacts across all parts of their business.
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