Among the findings in JTC’s 2023 Impact survey report is a surprising revelation about what many don’t understand about ESG and Impact investing.
While those in the industry may take it for granted that everyone knows about Impact investing and ESG, it’s important to understand the perceptions of investors and other stakeholders in order to develop better communication. JTC and OpportunityDb recently collaborated on a wide-ranging survey about opinions on ESG and Impact investing, both in the US and abroad.
The survey report is now available, and was discussed at a recent webinar featuring a panel of ESG industry experts. One thing that’s clear from the report is that investors may not be as far along in their understanding of Impact as fund managers would like, and a failure to take this into account could lead to problems in growth for Impact investing.
The Survey Report
Titled, “The Next Phase of ESG + Impact Investing is Here. Are You Ready?” the report is based on a wide-ranging survey conducted by JTC and OpportunityDb “drawing on the insights of nearly 300 advisors, fund managers, and investors across the US and Europe.” The research not only updates previous data on investor perceptions into impact sectors like Opportunity Zones, but also provides “vital benchmarks and guidance for stakeholders” moving forward.
Among the insights in the report is the finding that “investor perceptions toward ESG and Impact investing are overwhelmingly positive,” though these perceptions vary based on investor age as well as between US and European investors. The survey also shows that it’s incorrect to assume investors have a complete understanding of the terms “ESG” and “Impact investing;” it turns out a large percentage of don’t know there’s a difference at all.
What survey respondents said about the difference between ESG and Impact
According to the report, “About two-thirds of US respondents (65%) believe the two terms are interchangeable.” That means a majority of those who responded to the survey didn’t understand that the terms Impact and ESG refer to two different things.
“There’s a lot of confusion about those two things,” said JTC Group Managing Director Reid Thomas at our recent webinar, “The Evolution Toward Impact Investing: Rising Above the Noise.”
Even in cases where they understood that there is a difference between the two terms, survey respondents were “confused about the fundamental differences” that extend “to measuring impact, adopting reporting frameworks, and understanding particular investor needs.”
Much of the discussion around ESG and Impact centers around reporting frameworks, regulatory issues, and greenwashing, but those complex topics can’t be addressed until stakeholders agree on the basics. In order to take full advantage of all the useful information in the report, it’s important to clarify our terminology and why committing to proper definitions will only help investors better understand the good work that can be accomplished by Impact funds.
Impact vs. ESG: The importance of understanding terminology
ESG, or Environmental, Social, and Governance considerations, continue to grow as a sector, with some estimating they will soon account for half of all professionally-managed assets. If ESG is so popular, why would it be a bad thing for investors to think Impact investing is the same thing?
While ESG is popular and can involve positive changes for many companies, these criteria come with their own set of problems. Greenwashing, in which investments are ESG in name only, is rampant, and it’s been found that many ESG funds actually contain little ESG. Further, as the survey shows, the “profusion of different reporting standards” makes evaluation difficult.
The actual benefits of ESG investments are hotly debated, and the rise of anti-ESG rhetoric could negatively affect Impact fund managers. As noted recently by Pitchbook, “as ESG and Impact have been conflated, Impact has become politicized and ESG has detracted attention from Impact. Investors seeking socially and environmentally impactful investments have turned to ESG despite the fact that Impact, more than ESG, optimizes for benefit to society.”
In other words, if Impact investments are doing genuine good, associations with loosely-defined ESG considerations can only harm their reputations. Not only can this association with ESG harm Impact investments by removing focus from what makes them different, but it also lumps them in with a sector that is so crowded (and its definitions so vague) that it threatens to be rendered meaningless.
“ESG seems to be so polarizing and politically-charged right now,” said JTC Americas Marketing Events Manager Brenna Cahill at the webinar, with WealthChannel Founder & CEO Jimmy Atkinson agreeing that the term “turns a lot of people off.”
Clearly, if industry stakeholders are having this much trouble differentiating between the two, the terminology needs to be improved. Fund managers need to make clear to investors that while ESG may be about considering the effects of an investment or business practice on the environment or society, Impact is about working toward outcomes.
“In the simplest terms, impact investing is focused on investments aligned with investor values geared toward outcomes – investors can really see the direct connection between their investment and their impact,,” says Thomas in the survey report. “ESG investing, on the other hand, is more about mitigating risk through analyses of a company or fund’s policies, processes, and procedures.”
“Impact investing, to me, is much more meaningful,” said Trisha Miller, Executive Managing Director, Capital Markets, at Redbrick LMD. “We at Redbrick tend to focus on Impact investing and Impact investors,” she added, citing Redbrick’s intention to “apply influence to have a positive outcome for our community.”
As Jeff Shafer, Co-founder and CEO of CommonGood Capital, recently told JTC, “Impact investing is about intentionality, measurement, reporting, and striving for both financial and non-financial outcomes.”
The report stresses the importance of “measurable outcomes” as being the difference for Impact investments. If these outcomes are not properly measured and the results evaluated, then the investment can’t be said to have had a real impact.
Focusing on Outcomes: How to help investors understand Impact
The survey report discusses at length why a focus on outcomes and not inputs is vital to understanding Impact. Without communicating those outcomes properly, Impact fund managers cannot hope to have their intentions or achievements properly understood.
A good example of this is Opportunity Zones. Despite the efforts of many in the industry to pass legislation that would institute impact reporting standards, there is currently no requirement for measurement or reporting on impact. The result is that when evaluating the program, lawmakers have little to go on other than the amount of capital that has been invested, not the actual outcomes of those investments.
That’s why JTC focuses on monitoring and reporting on social impact, including the use of impact Rate of Return (iRR) methodology. While this type of measurement can be a differentiator for the best OZ funds, without sector-wide acceptance, it will be difficult to use this evidence to gain legislative victories or widespread acceptance of the program among the general public.
Concerns that the definition of “impact” could become too broad may lead to increased regulation in the US and Europe. But regardless of what moves regulators make, Impact fund managers need to separate themselves from the burden of ESG by demonstrating to investors what makes Impact investments different.
“A lot of investors do want to achieve a market rate return, they want to grow their wealth, but they also want to know that they are leaving an impact, leaving a legacy, or doing well while also doing good,” said Atkinson at the webinar, noting that compared to ESG, “Impact feels more personal.”
Thomas added that ESG and Impact are “both things that are intending to do good, so it’s very important to be clear about the definitions,” while pointing out that perception in the media does not always match reality.
“Despite the fact that ‘ESG’ is a ‘bad word’ in some sectors, the reality is the notion of investing for good is strong and alive and well.”
Greater education will be required for investors to understand what Impact is and which investments are truly delivering it. As stated in the survey report, “our findings reflect a persistent confusion around the differences between the two terms as both gain increasing traction in the marketplace – suggesting the need for more clarity, transparency, purposeful measurement, and focus.”
More from Our 2023 Impact Survey
The Impact vs. ESG issue is just one of many that was addressed in the survey report. Other topics include challenges with reporting standards and access to data, best practices for measuring impact, and the importance of personalization in fund offerings and measurement. The full survey report also has data on Opportunity Zones and insights about European attitudes toward ESG, so make sure to download the full report today.