What is the Difference between Socially Responsible Investing and Impact Investing? (2024)

Financial Return Expectations

Within mission-driven investing, there is varying prioritization of positive impact creation in relation to financial returns.

In SRI, while investors aim to avoid investments in harmful companies and industries, the intent is still to maximize financial returns. Thus, investment managers practicing SRI have a fiduciary duty to their investors to make investment decisions in order to generate the highest rates of return.

Impact investors, on the other hand, vary in their financial return expectations. While some impact investors seek competitive or market-rate returns, others may be willing to accept below market-rate returns in order to maximize impact.

However, it is important to note that fiduciary responsibility to investors and pursuit of positive impact are not necessarily mutually exclusive. For instance, in a study conducted by the Wharton Social Impact Initiative, the majority of impact fund managers sampled explicitly state their level of intention to pursue and generate impact in their limited-partner agreements, private placement memorandums and other investment agreement documents (See Figure 1). As a result, some impact fund managers are legally obligated to meet the requirements set forth by their investors regarding the extent to which impact factors are incorporated in investment analysis.

Fig. 1 . Source: Wharton Social Impact Initiative reportGreat Expectations Mission preservation and Financial Performance in Impact Investing; October 2015. See more at:Profits and Purpose: Wharton Study Finds that Impact Investments Can Produce Both Market-Rate Returns and Long-Term Impact

Is It All Semantics?

While SRI and impact investing have key differences, both fall within the spectrum to which an investor can integrate mission into their portfolio. Both SRI and impact investing rely on nonfinancial metrics to determine the impact – positive or negative – that a company or organization may have on the environment or the surrounding community. And, while one of the key differences between SRI and impact investing may be financial return expectations, there is a growing body of evidence supporting the ability of impact investments to produce and, at times, outperform the market rate of return when compared to non-impact investments (To read more about the performance of Impact Investments, see:The Financial Performance of Impact Investments). Regardless of the approach used by investors, both SRI and impact investing are a testament to the various ways values-based investing can be incorporated into an investment strategy.

What is the Difference between Socially Responsible Investing and Impact Investing? (2024)

FAQs

What is the Difference between Socially Responsible Investing and Impact Investing? ›

Socially responsible investing involves choosing or disqualifying investments based on specific ethical criteria. Impact investing aims to help a business or organization produce a social benefit.

What is the difference between ESG investing and socially responsible investing? ›

The idea of ESG investing is an evolution of the trend toward socially responsible investing, but ESG provides a broader framework for looking at social impact beyond simply excluding companies associated with negative outcomes.

What is the difference between impact investing and social finance? ›

Impact investments complement philanthropy and government spending to scale promising solutions for change. Social Finance develops and manages innovative, impact-first investment products that generate positive outcomes for people and communities.

What is the key differentiator between ESG-based investing and impact investing? ›

Impact investing is more focused and deliberate in seeking investments with a specific social or environmental outcome. In contrast, ESG investing considers a company's ESG factors and traditional financial metrics. This is one of the main differences between ESG and Impact investing.

What is the difference between traditional investing and impact investing? ›

So what is the key difference between impact investing and these other approaches? “Traditional” investing has little to no interest in ESG factors and is more focused on returns. The only impact measured here would be on the account of the investor. Impact investing is also not a form of charity or philanthropy.

What is the difference between SRI ESG and impact investing? ›

It's important to note that impact investing refers to private funds, while SRI and ESG investing involve publicly traded assets. For investors who seek transparency about the specific ways their capital is being applied to a particular cause, impact investing might be a more attractive vehicle than ESG or SRI.

What is impacting investing? ›

A way to make a difference with your investments while generating financial returns. Impact investing is the act of purposefully making investments that help achieve certain social and environmental benefits while generating financial returns.

What is socially investing? ›

Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts. Socially responsible investing has been growing in popularity in recent history.

What is the difference between social value and impact? ›

The key difference between social value and social impact is that social value focuses on the short-term benefits that a business provides to society, whereas social impact looks at the long-term, sustainable impact that a business has on society and the environment.

What are the three components of impact investing? ›

The main elements of impact investing include:
  • Intentionality. Impact investing is purpose-driven. ...
  • Measurable Impact. Impact investments have measurable, quantifiable and transparent outcomes. ...
  • Expected Returns. Like traditional investments, impact investments involve an assessment of risk and return.
Oct 25, 2023

What are the disadvantages of ESG investing? ›

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

Is ESG part of impact investing? ›

No, impact investing is not equal to ESG investing, although they are often used interchangeably.

What is an example of a socially responsible investment? ›

They include:
  • Mutual Funds and Exchange-Traded Funds (ETFs) Several mutual funds and ETFs adhere to the ESG criteria. ...
  • Community Investments. An investor can also put their money directly into projects that benefit communities. ...
  • Microfinance.

What are the benefits of impact investing? ›

The growing impact investment market provides capital to address the world's most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

What is impact investment for dummies? ›

Unlike traditional investing, where the goal is purely financial gain, impact investing seeks to make a difference. Impact investing firms support causes like renewable energy, healthcare, education, and economic development.

How to be a socially responsible investor? ›

In general, socially responsible investors encourage corporate practices that they believe promote environmental stewardship, consumer protection, human rights, and racial or gender diversity.

What is the difference between ESG and social responsibility? ›

Corporate Social Responsibility (CSR) refers to sustainability strategies businesses employ to ensure that the company is carried out ethically. In contrast, Environmental, Social and Governance (ESG) are criteria used to measure a company's overall sustainability.

What is the main difference between CSR and ESG? ›

CSR focuses on corporate volunteering, lowering carbon footprint, and engaging with charities. ESG provides a more quantitative measure of sustainability. ESG considers environmental, social, and governance factors. ESG improves the valuation of the business.

What is the difference between social value and ESG? ›

Going a little deeper, ESG was originally conceived with Risk avoidance in mind, while social value is a more positive way of constructing the narrative – by looking at the value you can proactively create.

What is ESG socially responsible investing? ›

This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Twana Towne Ret

Last Updated:

Views: 5513

Rating: 4.3 / 5 (64 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Twana Towne Ret

Birthday: 1994-03-19

Address: Apt. 990 97439 Corwin Motorway, Port Eliseoburgh, NM 99144-2618

Phone: +5958753152963

Job: National Specialist

Hobby: Kayaking, Photography, Skydiving, Embroidery, Leather crafting, Orienteering, Cooking

Introduction: My name is Twana Towne Ret, I am a famous, talented, joyous, perfect, powerful, inquisitive, lovely person who loves writing and wants to share my knowledge and understanding with you.