Impact investing vs ESG investing

Many of our clients would like to invest sustainably. But what exactly does that mean? The answer to that question has changed considerably in recent years. It used to be that everyone was allowed to give ‘sustainable investing’ their own interpretation, but EU regulations have changed that. The criteria are now that an investment can only be called sustainable if it contributes to at least one environmental or social objective and does no significant harm to any of the other environmental or social objectives. In addition, the company providing the investment vehicle must be managed responsibly.

If you plan to invest sustainably, you will encounter terms like ESG investing and impact investing. What exactly do those terms mean, and what’s the difference between the two?

The acronym ESG stands for environmental, social and governance. So when assessing a company’s ESG performance, we look at how they are performing in the environmental, social and governance areas.

A company is included as an ESG investment if it meets a number of sustainability criteria, but not yet all the criteria that an investment must meet to qualify as sustainable. In addition, certain activities and companies are automatically excluded, for example companies involved in the production of controversial weapons or tobacco.

Clients of ABN AMRO’s Portfolio Management can arrange ESG investing through the ESG Fund Mandate.

Impact investing goes one step further. The same exclusion criteria apply to this and we also assess companies on sustainability criteria. However, they must also have a positive impact on the environment and/or society. And this impact must be measurable.

To assess whether a particular company can be deemed to be an impact investment, ABN AMRO makes an analysis based on as much data as possible. In our assessment, we look at what part of the revenue is earned through activities that have a positive impact. We also look at any aspects that have a negative impact. The sum total must be positive in terms of impact: only then do we deem this to be an impact investment.

For example, if a health insurer meets many of the ESG criteria, this does not automatically make it an impact investment. This can, however, be the case if this health insurer makes a positive impact. Such a case might be, for example, a US health insurer that participates in special programmes like Medicare or Medicaid that improve access to healthcare for certain sections of the American population.

Clients of ABN AMRO’s Portfolio Management can arrange impact investing through the Impact Funds Mandate.

ABN AMRO does not only focus on companies that make a positive impact as described above: we also engage with companies that take the sustainability criteria seriously and want to improve.

An example of such ‘engagement’ could be a supermarket chain that meets many ESG criteria. However, alongside the healthy products it sells, it also stocks tobacco and alcohol. This means the sum is not positive and the company does not fall under impact investing. However, if the supermarket is open to discussing how it can improve, this is also valuable, because companies that are on the right track play an important role in the transition to a more sustainable society.

Naturally, with impact investing, the positive impact is paramount. In addition, we aim for a market-level financial return. However, it’s important to realise that the performance of an impact portfolio cannot be compared directly to that of comparable traditional funds and will not always stay exactly in step with these. There are variances: the portfolio can perform well one year and not as well the next. On average, however, there is not much variance with traditional funds over the longer term.

When you become a Portfolio Management client, one of the things we will ask you about is your sustainability preferences. This is so we can create a profile for you that matches your preferences.

According to Judith Sanders, sustainable investment strategist at ABN AMRO, increasingly more clients are telling us that they want to invest sustainably. There is also more demand for impact investing. “This rising demand is mainly driven by the desire to gain insight into the impact you are making as an investor,” says Sanders. “It used to be clear that you were investing sustainably if you invested in a company that made wind turbines, for example. But how do you rate companies where their impact is not immediately apparent? The need for evidence has clearly grown. Investors not only want to know in what way they are having an impact, they also want to be able to compare parties with each other. And there is one more reason for the increasing demand for impact investing: the good feeling it gives investors who consciously choose to invest this way. They see the positive impact they are making.”