From ESG to Impact, Aligning Your Investments With Your Values
Updated: 5 days ago
Oikocredit has been making social impact investments for more than 45 years. This means the co-op has been dedicated to making a difference even before the term “Impact Investing” had gained popularity or its own market.
But what even is impact investing? And does it have anything to do with the ESG (environmental, social, and governance), sustainable, or responsible public market funds that have exponentially increased in scale in North America in 2020? The answer is: all these investment options can align your investments with your values. But let’s dig into what specifically we mean.
There are three distinct characteristics to ESG, impact investing, and any other of the terms we describe below:
What are your negative screens on your portfolio (what investments are you avoiding?)
Are you trying to make a specific positive social or environmental impact?
What are your expectations for a financial return?
Bridges Fund Management created a spectrum diagram that uses these three characteristics to help define these terms:
Now for some definitions. ESG, Environmental Social and Governance – what do each of these words mean? Here are a few examples of what an ESG screen would look at:
Environmental: reduction of greenhouse gas emissions or other pollution, energy conservation, renewable energy generation, sensitive habitat protection.
Social: safe and healthy working conditions, labor and human rights standards, diversity equity and inclusion, a strong relationships with neighbors and other community stakeholders.
Governance: executive compensation, governing or executive board structure, measures to prevent corruption and bribery, transparency.
An investment that uses an ESG screen only, and which falls into the “Responsible” or “Sustainable” categories above, will use these and other criteria to rate and qualify companies. Most of the popular ESG funds today fall into the “Sustainable” category.
Impact Investing – This is when you make an investment with the goal of making a social or environmental impact in addition to a financial return. This category is broad, and is heavily influenced by that third criteria we mentioned: expectation on return. A few examples:
Renewable Energy – Investing in renewable energy here in the US can have a positive environmental impact. This industry has also matured over the last 20 years, and any investor can now make these investments through public market funds. The risks and returns are well understood.
Community Development Financial Institutions (CDFI) – Supporting your local CDFI through investing strengthens your local economy through increasing access to affordable loans for local businesses. These returns are often modest (1% - 3%) but many CDFIs have long histories of successfully returning funds to investors, so some of the risks are mitigated.
Direct Investing in a small business or social entrepreneur – Many new tools have increased these options in the US, such as crowdfunding regulations. Making direct investments of this kind is high-risk and the returns are uncertain.
Portfolio of microfinance and social impact – This is the type of investing that Oikocredit does. With a portfolio of more than $1 billion in assets and 45 years of history, Oikocredit gives investors the ability to make a modest return on investment (historically 0-2%) along with high social impact.
So, whatever your values are, whatever global impact you want to make with your investments, there are now more tools and investment options than ever to help you align your investments with your values.