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Impact investing vs ethical investing (What’s the difference?)

What is the difference between impact investing vs ethical investing?

Impact investing, and ethical investing are two different ways of looking at investments.

Impact investors specifically target businesses that positively impact society or the environment, while ethical investors invest in companies that align with their personal values. There is no right or wrong answer regarding which type of investor you should be; it depends on your individual beliefs and goals.

This article will cover the main differences between impact investing and ethical investing and how you can decide which is best for you.

Impact investing vs ethical investing

What is impact investing?

When you invest your money, you want to ensure that you’re doing what’s best for yourself and not harming someone or somewhere else in the world.

But sometimes, it can be tough to know exactly how to invest in a way that aligns with your personal ethics.

That’s where impact investing comes in. Impact investments are made to businesses or organizations to create social or environmental impact and a profit. In other words, impact investing allows you to do good and make money at the same time.

Impact investing is a relatively new and exciting way to make your money work for the world.

Impact invest has four core principles

  1. INTENTIONALITY: Investments are intentionally trying to positively impact or find a solution to the world’s social and environmental challenges. This sets them apart from ESG or responsible investing, which are not necessarily looking for solutions but just trying not to make things worse.
  2. FINANCIAL RETURNS: Impact investments are trying to make a profit. This could be below or above-market returns. But the idea of making a profit is there.
  3. RANGE OF ASSET CLASSES: Impact investments can be across a range of assets wherever the greatest impact for a particular problem can be found.
  4. IMPACT MEASUREMENT: This is one of the key differentiators from ESG and sustainable investing. Impact investing has a high commitment to measuring and documenting its performance against social and environmental challenges, i.e. it tries to prove the impact it is having.

Impact investors seek out companies that produce social or environmental benefits, such as

  • renewable energy sources like wind power, electric cars which can be powered with clean electricity generated from solar panels or wind turbines,
  • microfinance organizations providing loans so people who live in poverty can start their own enterprises.
  • Sustainable agriculture practices designed not just to provide food but also water conservation to reduce risks associated with climate change.

What are the benefits of impact investing?

There are a few key benefits to impact investing.

First, impact investments can help support businesses that are working to create positive change in the world. This can be anything from businesses that are working to reduce environmental impact to those that are promoting social and economic inclusion.

Second, impact investments can offer financial returns as well as social or environmental impact. This means that you can make a difference with your money while also growing your investment portfolio.

Finally, impact investing can help diversify your portfolio and reduce your overall risk to companies that do not consider social and environmental concerns.

What is ethical investing?

Ethical investing is very similar to impact investing in that it also takes into account your personal values and beliefs.

The main difference between ethical investing and impact investing is that, with ethical investing, you’re not necessarily looking to create social or environmental impact.

Rather, you’re simply ensuring that your money is going to a company that is doing business in a way that aligns with your personal ethics.

What are the benefits of ethical investing?

Ethical investing is a way to invest in companies that are doing business in alignment with your values.

This can include environmentally friendly, socially responsible companies or that support a cause you care about.

Ethical investing can offer financial returns and peace of mind knowing your money supports companies with values similar to your own.

What are some common ethical investment strategies?

There are a few common ethical investment strategies.

One is to invest in publicly traded companies that have high environmental, social, and governance (ESG) ratings.

Another strategy is to invest in impact funds, which are speciality funds that focus on investments that generate both financial returns and positive social or environmental impact.

Finally, you can also choose to invest in individual stocks of companies you believe are doing good.

Is impact investing ethical?

Impact investing is trying to have both positive social and environmental impact as well as make a profit.

Does that sound ethical to you?

The tricky part is that everyone has their own set of ethics.

For some people, even making a profit is unethical – investing for profit is probably not for them then.

But as impact investing generally has a greater level of scrutiny and evidence required to prove it is having a positive impact on society, the environment, and profit, it is likely to be on the more ethical side of investments.

But you will need to check if it meets your specific definition of ethical if you want to be sure.

Why invest ethically?

There are a number of reasons why investors might want to consider investing ethically.

Some people might want to avoid companies that are involved in unethical activities, such as human rights violations or environmental destruction.

Others might prefer to invest in businesses that positively impact society and the environment, such as those that promote social or environmental justice.

Still, others might want to use their investments as a way to support businesses that align with their personal values, such as companies that are environmentally friendly or that promote sustainable development.

And finally, some might feel that if companies are behaving ethically, they will naturally be more successful.

The jury is still out on that one, but there is a point that ethical companies may well avoid some of the growing risks around environmental, social and governance type issues that dog some companies and cause their profits to drop or the company to even fail.

How to invest ethically

There are a number of ways to go about investing ethically.

One option is to screen your investments for ethical concerns.

This means researching the companies you’re considering investing in and ensuring that their business practices align with your personal values.

Another option is to invest in impact-focused funds, which are investment vehicles that specifically target businesses that are working to create social or environmental impact.

Doing your own research is a good idea, but you might find you can only go so far yourself before you need to rely on outside guidance.

This is where the use of impact investment funds where the screening etc., is done for you might be an easier way to get started.

Ethical investment strategies and risks.

There are a number of different ethical investment strategies that investors can use, each with its own set of risks and rewards.

For example, some ethical investors might choose to invest only in companies that positively impact society, even if those companies are not necessarily profitable.

This strategy can be risky, as the investor may not see a return on their investment.

However, it can also be rewarding, as the investor can feel good about supporting businesses that are making a positive impact

Other ethical investors might choose to invest in profitable companies that positively impact society.

This strategy is less risky than the first, as the investor is more likely to see a return on their investment.

However, it is important to remember that no investment is without risk, and even profitable companies with a positive impact on society can fail.

The bottom line: Impact investing vs ethical investing

There is no right or wrong answer when it comes to impact investing vs ethical investing.

It ultimately depends on your personal values and beliefs.

If you’re looking to make a financial commitment to create social or environmental impact, then impact investing might be the right choice for you.

If you’re simply looking to ensure that your money is going to a company that is doing business in a way that aligns with your personal ethics, then ethical investing might be the better option.

Getting yourself informed is the first step in the process.

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FAQ: Impact investing vs ethical investing

Is ESG part of impact investing?

ESG considerations can be part of impact investing; however, although often used interchangeably, impact investing and ESG investing don’t necessarily mean the same thing.
ESG is just one component of impact investing. Whereas ESG funds may or may not take into consideration impact in their selection processes.
 

What is the difference between impact investing and socially responsible investing (SRI)?

The main difference between impact investing and SRI is that impact investing specifically targets investments that generate a social or environmental impact, while SRI simply screens out investments that are deemed to be unethical.
So, for example, an impact investor might invest in a company that is working to develop clean energy, while a socially responsible investor might avoid investing in a company that manufactures cigarettes.
 

What is the difference between impact investing and philanthropy?

The main difference between impact investing and philanthropy is that impact investing is designed to generate both a financial return and a social or environmental impact. Whereas philanthropy is not necessarily looking for a profitable return.
 

What is the difference between ESG investing and impact investing?

ESG investing, or environmental, social, and governance (ESG) investing, is ethical investing that focuses on environmentally friendly companies, socially responsible, and good governance. Impact investing, on the other hand, is a type of impact investing that specifically targets businesses that are working to create social or environmental impact.

Resources

https://thegiin.org/characteristics

https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/

Photo by Zbynek Burival on Unsplash

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