How ESG and impact can be complementary forces 

Environmental, Social and Governance considerations – ESG – have become core tenets of the financial industry over the past ten years. This adoption has been driven by various factors, not least by increasing investor awareness around climate change and global governments’ move towards more sustainable energy sources, which was exacerbated last year by Russia’s invasion of Ukraine and the subsequent energy crisis.  

Last year, The Economist released a scathing analysis of ESG frameworks and their outcomes, concluding that a misalignment between the asset management industry’s raison d'etre – to generate returns for its investors – and the profitability of ESG had, thus far, proven too big a bridge to cross.

It’s become clear over time that while a focus on ESG factors such as climate or diversity is a significant step in the right direction, it is not able to guarantee both healthier markets and a more stable or equitable planet, at least not on its own.

Instead, some investors have turned their attention toward impact investing, where progress may feel more tangible progress can be made. Impact, particularly in private markets, offers investors the opportunity to be a more active investor than is typical and input into companies with targeted societally beneficial outputs. From this perspective, impact investing gives investors a seat at the table, access to specific challenges that are smaller and more solvable, and the chance to change companies from within in order to make those desired solutions happen.  

We’ve said before that impact investing begins where ESG stops – that they are in fact, part of the same spectrum. ESG has proven itself to be a valid starting point for companies and investors alike, as a focal point for engagement around its core issues and as a way to appraise them outside the context of negative screening. There are opportunities in ESG as well as moral duties, and that is reflected by its firm integration into the investment process for most firms today. 

Impact allows us to build on those foundations of ESG and have a more direct influence on chosen matters. It allows investors to guide companies through partnership rather than legislation and directives alone. Furthermore, impact investing exists to create greater alignment between companies and ESG issues, which in turn helps alleviate some of the in-built contradictions of outright returns versus societal considerations. 

But from an investor’s perspective, how to integrate ESG and impact considerations into their strategy can be complex.

Impact investments have an accessibility issue, particularly for non-professional investors – Gen Zs, for example, appear keen to align their assets with their ethics – with fewer vehicles available within the marketplace. These investments often tend to be relatively illiquid, which compounds the issue further. ESG funds and vehicles, on the other hand, now hold a considerable market share and are tradeable over the counter in a manner that many impact-related funds are not, or at least are not yet. 

Furthermore, impact investing requires, at least at some level, interaction with firms from sectors such as energy and technology, many of which are already engaged at an ESG level. 

We believe that the respective attributes of ESG and impact investing are complementary, and that when used in lockstep, investors have a greater opportunity to help shift legacy practices in these areas, particularly in energy, toward a more sustainable, climate-positive arena. 

You can learn more about impact investing here or contact your local Mercer representative to talk about how we can help you integrate ESG and impact into your portfolios.