The growing impact investment market provides financial resources to address what some regard as the world’s most pressing needs. The IMPACT app lets you select specific issues you care about most such as Clean Air, LGBTQ Inclusion and Consumer Safety.
Impact investing challenges the long-held views that social and environmental issues should be addressed only by philanthropic donations.
Impact investment has attracted a wide variety of stakeholders, both individual and institutional.
Impact investing is a relatively new term used to describe investments made across many asset classes, sectors, and regions. The Global Impact Investor Network (GIIN) estimates the total size of the market to be at USD 715 billion, managed by 1,720 organizations1.
ESG refers to the environmental, social and governance practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional analysis by identifying potential risks and opportunities beyond current financial metrics.
ESG, which stands for Environment, Social and Governance, was derived from socially responsible investing practices. These focused on excluding certain products which conflicted with defined social, moral or ethical values and beliefs.
In fact, the concepts and rules of socially responsible investing, or SRI, may be traced as far back as 3,500 years ago. Different religious groups aimed to instill in its members certain values by prohibiting financial transactions related to alcohol, gambling, tobacco, firearms and other products.
In the modern era, the spotlight turned to public health and social welfare issues. The Community Reinvestment Act of 1977, for example, was designed to encourage financial institutions to help meet the needs of borrowers residing in low- and moderate-income neighborhoods.
And later, in the mid-1980s the Forum for Sustainable and Responsible Investment was founded after the partial meltdown at the Three Mile Island nuclear power plant spurred fears about environmental disasters.
While SRI practices centered on addressing social, moral and ethical concerns in the context of financial decision-making, concerns affecting the environment, society and corporate governance led to a more focused, financially relevant investment discipline: ESG investing.
The pivotal event that marked the inception of ESG investing – a strategy that has recently seen surging inflows into investment funds - goes back about 20 years. Kofi Annan, then the UN Secretary General, formed a joint initiative under the UN Global Compact with the International Finance Corporation and the Swiss government. The initiative was intended to devise ways to incorporate ESG into the global capital markets and yielded a report called 'Who Cares Wins'. Other efforts conducted by the UN resulted in another report, known as the 'Freshfields Report'.
A series of supporting frameworks was developed including the UN’s Principles for Responsible Investing (PRI) and Sustainable Stock Exchanges (SSE). Improvements in transparency and accountability were made through the Global Reporting Initiative (GRI), the International Integrated Reporting Council and the US-based Sustainability Accounting Standards Board (SASB).
By 2015, the UN established Sustainable Development Goals – a collection of 17 interlinked global goals that were designed as a blueprint to achieve a “more sustainable future for all". SDGs include eliminating poverty, zero hunger, building sustainable infrastructure, gender equality and climate action. They are intended to be achieved by the year 2030 and are used to serve ESG-investment frameworks.
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Sources: Global Impact Investor Network, Investopedia, Interactive Brokers’ Traders’ Academy ESG Investing.