Impact Investing — An Investment Approach That Is Ready for Prime Time

Gary Hunt • 11 May 2021

Impact Investing — An Investment Approach That Is Ready for Prime Time

There is a small — but rapidly growing — set of investors that want to go further and ensure that their investment portfolios have positive social and environmental impact, alongside financial returns. This group of investors is not just concerned with ESG risks that may affect the financial performance of the firm (the so-called First Materiality), but also the effects that the firms they invest in may have on wider society and the environment (the so-called Second Materiality). 

Investors have always known that their investments have social and environmental impacts. But until recently, it was seen more as a side-effect than the goal of investing. For many years, socially concerned investors have screened out certain investments from their portfolios — such as so-called “sin stocks” of companies involved in gambling, alcohol and tobacco. More recently, as environmental concerns have come to the fore, investors have gone beyond simple screening out of certain types of firm towards assessing the ESG (environment, social and governance) risk in all the investments in their portfolio. As they have done so, they have started to appreciate that engagement with these companies not only can reduce risks which may affect financial performance, but also can contribute to better environmental and social outcomes. This has become known as ESG investing, and today up to one third of global assets are managed in alignment with the UN Principles of Responsible Investing

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Citation: International Finance Corporation
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