ESG lays the groundwork, impact investing extends the boundaries
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ESG lays the groundwork, impact investing extends the boundaries

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Understanding the differences between ESG investing and impact investing is increasingly important, say Diana Ribeiro Duarte, Pedro Capitão Barbosa, and Sofia Araújo Matias of Morais Leitão, Galvão Teles, Soares da Silva & Associados

Although impact investing and ESG investing are frequently used synonymously and share many similarities, there are significant distinctions between the concepts. This misunderstanding has detracted attention from the value of impact investment because it unduly subsumes this investment strategy into the ESG investment framework (which is already cluttered).

The main differences between the concepts are as follows:

  • While ESG focuses on environmental, social, and governance factors, and on the investment’s effects on the environment and society, impact investors intend to have a measurable positive social or environmental impact, taking into consideration the company’s business model. In short, ESG investors assess how a firm is run, whereas impact investors measure what the organisation generates in non-financial benefits. For instance, an ESG investor will not invest in firms that emit considerable amounts of greenhouse gases. An impact investor, on the other hand, will only invest in firms that are actively working to minimise them.

  • Due to its ex post nature and defensive approach (and notwithstanding stewardship initiatives by the largest institutional investors), an ESG investor pursues risk mitigation (negatively screening out companies) or ESG opportunities (picking companies that can have an ESG-positive impact). On the contrary, an impact investor tends to seek and cause both. By investing in companies that are attempting to change the world, an impact investment generates an opportunity by investing in firms that actively minimise or address ESG risks.

  • ESG investors focus on inputs and on the company’s past performance and practices (how it operates), while impact investors rely on outcomes (what problems it intends to solve) and engagement, and in intentionally setting a quantifiable goal, with social or environmental benefits. ESG investing is therefore inward looking and impact investing is forward looking.

Being aware of these differences is critical when seeking alignment between an investor’s values and ambitions and the chosen investment approach. In the end, an investor’s aims, preferences (e.g., the desired level of sustainability integration and its risk appetite), and maturity level will determine whether to pursue one strategy, the other, or both. All impact investments are supposed to be ESG compliant, but not all ESG investing is an impact investment; in this sense, impact investing can be thought of as a subset of ESG.

Below are some of the more specific ways where the concepts differ.

Scope and target

Whereas ESG appeals to a variety of investors as its criteria may apply to any type of investment, portfolio, asset class, or industry (to determine, for example, if an investment meets the company’s principles and values, and to evaluate its social responsibility and sustainability practices), impact investing typically has a narrower approach, which is intentionally and actively focused on investing in companies or initiatives that will change the world for the better.

The mindset is different: ESG underlines the importance of not investing in companies that harm sustainability factors, and impact investing is about investing in companies that are actively striving to alter the status quo.

Also, whereas ESG investors have a more holistic approach to sustainability, impact investors are sector or theme focused, looking to invest in particular problems and solutions (e.g., combating climate change, promoting gender equality, or increasing the availability of education in developing countries). Healthcare, affordable housing, education, renewable energy, cleantech, sustainable agriculture, and food production are the most commonly targeted sectors.

In addition, compared with ESG investing, impact investing is frequently seen as having a greater focus on active management. Impact investors engage closely with the businesses they invest in, offering them not only funding but also guidance and mentoring. Impact investment is therefore more frequently seen in alternative asset classes (e.g., private equity, microfinance) than in ‘mainstream’ assets (e.g., traded equities).


One of the ideas often touted behind ESG investing is the hope that a company’s social and environmental performance has a direct bearing on its long-term financial success (by avoiding or mitigating certain non-financial risks). Impact investing also seeks to generate an adequate risk-adjusted financial return; however, there are differences.

ESG investing pays attention to, and prioritises, sustainability factors, provided that they are ultimately beholden to financial returns, always considering the growth prospects and, most importantly, the company’s risk profile.

Impact investors, on the contrary, intend primarily to be transformation agents and therefore their main focus is to go beyond monetary gains. These investors may prioritise sustainability outcomes and a greater impact over financial gains as they may consciously select to invest in assets with lower expected financial returns.

Nevertheless, recent reports by the Global Impact Investing Network (GIIN) have shown that nearly three quarters of impact investors seek market-rate returns and that these investments are more resistant to market volatility and other economic factors compared with traditional, or even ESG, investments. Impact investment returns are claimed to be more predictable and stable than ESG investment returns.


Traditional financial measurements and ESG ratings and metrics are used by ESG investors to analyse and evaluate a company’s financial viability and sustainability performance, respectively (e.g., carbon emissions data). Likewise, impact investors use quantifiable metrics to measure their positive impact on society or the environment and are dependent on them. The outcomes need to be properly examined to measure the positive impact, otherwise it is difficult to get sophisticated investors to participate.

Data is key to ESG research and to analysing companies’ ESG performance, practices, and potential impact. The availability of ESG data, and its inherent comparability and transparency, enable more accurate assessments and investment decisions. Impact investment is no different: the assessment of whether an impact investment is worthwhile requires extensive data to enable a correct evaluation of the impact outcomes of the company’s actions and products. Unlike ESG, regarding which there is already ample public information for its metrics (albeit still with significant shortcomings), data for impact investment is more bespoke and may be reliant on independent research just for that project or company. The inconsistencies in data standards and collection faced by ESG investors are even greater barriers for impact investors.

And how can we quantify and/or measure the ‘impact’? Unfortunately, there is no regulatory standardisation or measurement currently, but the IRIS+, the United Nations Sustainable Development Goals (SDG), and the social return on investment are tangible measures that have been helping investors to track the impact. Furthermore, the United Nations Development Programme’s SDG Impact Standards, the GIIN’s Core Characteristics of Impact Investing, the Global Reporting Initiative, the Impact Management Project, and PwC’s Total Impact Measurement and Management Framework have proven to be useful tools for impact investors.

In reality, this has been a major obstacle for impact investors due to the wide spectrum and complexity involved in assessing impact. The lack of information, clarity, transparency, and standardisation are of no help. Therefore, there is a growing recognition of the need for consistent metrics, specific regulations, or even the construction of an impact index in impact reporting. Monitoring, verification, and evaluation are essential to protect impact investments from ‘impact-washing’ accusations.

Understanding the evolution

The sustainable investment landscape is set to grow further and rapidly evolve, bringing new possibilities to the table. The urge to invest ethically is particularly strong among millennials and Gen Zs who strive to unite two forces that appeared to be antagonistic: financial resources and purpose. ESG and impact investing are both effective agents of positive change, linking financial returns to a more sustainable future.

ESG and impact investments are likely to rise in 2024 as the world becomes more conscious of the need for sustainable development. Although ESG is expected to continue to be the standard approach, impact investing will gain more attention and continue to grow in popularity. With reference to 2022, the GIIN calculated the global impact investing industry to be worth $1.164 trillion, confirming its massive expansion compared, for instance, with 2020 ($715 billion). Additionally, according to Vontobel’s 2023 Impact Investing Survey, over the next three years, approximately 70% of investors worldwide are planning to increase their allocations in impact investing solutions.

While waiting for this evolution to happen and to successfully progress into the future, it is prudent to clearly understand the terminology and the differences behind both concepts, also recognising the impact investment opportunities and its potential for non-financial change. After all, this is what recent history has shown us: many companies have success stories that demonstrate how transformative impact investing can be and the tangible outcomes that can be obtained by a company while still pursuing financial objectives.

Where ESG ends, sometimes impact investment can begin.

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