To help you choose the financial strategy that best embodies your goals, we’re unpacking impact investing vs sustainable investing, and we’ll even touch on ESG investing. While all three terms are similar, we’ll explore the nuances of each to help you get one step closer to 100% green investing.
Before evaluating the differences between sustainable investing vs impact investing—and ESG vs impact investing—let’s define some key terms:
- Impact investing – A strategy that prioritizes positive change and strong investment returns.
- Standard investing – Investing based solely upon maximizing estimated returns.
- Return on investment (ROI) – The profit (or loss) you make from your stock, bond, fund, or product purchase.
- Environmental, Social, and Governance (ESG) considerations – The ecological, equity, and transparency ramifications of a company or organization.
When it comes to impact investing, investors value a positive social impact—on the environment, social equity, or anything else—and strong, consistent ROIs equally. Impact investing is an umbrella term that encompasses both sustainable investing and ESG investing.
Let’s explore an example. Perhaps you have $100 to invest, and you narrow your choices down to two competing mutual funds—a sustainable investment fund and a traditional fund that doesn’t evaluate companies’ non-financial impacts.
Historically, both hypothetical funds performed well—the sustainable fund had a 5% year-to-date ROI, while the traditional fund realized a 5.5% ROI. For funds with similar returns, the impact investor would choose to invest in sustainable funds that embody their values more closely.
Sustainable investing is a type of impact investing strategy that specifically prioritizes stocks, funds, and other investment products that create positive environmental change and offer a strong ROI.
Like an impact investment decision, it’s important to note that sustainable investment strategies aren’t necessarily charitable—impact investors still value traditional investing concepts like:
- Consistent and considerable ROI
- Holding a diversity of investment assets
- Appropriately managing risk
- Creating and meeting both short- and long-term investment goals
But, sustainable investors assess an investment product’s alignment with the values above and their environmentalist goals. Instead of investing in a big bank, they’d likely opt for a company that, for instance, offered a green credit card.
There are multiple ways to embody sustainability in your investment portfolio:
- Pick sustainable companies to invest in that feature actionable sustainability plans and goals, like using a sustainable financial services provider.
- Support brands that offer products or services that could create positive environmentalist changes.
- Explore funds that feature a combination of both kinds of sustainable companies.
Environmental, Social, and Governance (ESG) investing is another subset of impact investing. While many people question, ‘Is ESG the same as sustainability?’ it is important to consider that ESG investors prioritize stocks, funds, and other investment products that are compatible with a variety of values. An ESG investment zooms out from sustainability to focus on multiple interrelated factors:
- Environmental – ESG investors assess a company’s impact on the environment and its plans to create positive social impact.
- Social – Investors consider the social ramifications of a brand before investing. For instance, an ESG investor would likely prioritize a brand that fosters equitable workplaces, hires diverse teams, or supports unionization.
- Governance – An ESG investment decision considers the people at the top of a company’s pyramid. They seek brands with a diverse C-suite, profit-sharing programs that benefit every employee role, and progressive leadership values.
Just like impact investors at large and sustainability investors, ESG investors value the all-too-important ROI. While a progressive company may embody their values, they won’t support the brand unless they predict positive returns.
How to Invest in Your Values
Whether you fancy yourself an impact investor, a sustainability investor, or an ESG investor, there are ways to ensure that your portfolio reflects your values.
Let’s explore some places you can find key information about a company before you commit to responsible investing in them:
- Company website – Start on a company’s website. To explore their sustainable values, search for a page that details their plans to make an environmental impact and breaks down the sustainability efforts they’ve made so far. For governance information, navigate to a page highlighting the company’s executives.
- News articles – Search for your potential investees in the news. Are they living up to their plans for positive change, or are they over-inflating their commitment to change?
- Stock monitoring sites – To explore a stock’s ROI and price history, use a third-party investment information website that aggregates stock data, like MarketWatch. Getting this information from a third party is important—they provide unbiased, transparent information because they’re not selling investment products.
Aspiration: Simple, Sustainable Financial Solutions
An impact investment is nuanced, but it isn’t complicated—impact investors, sustainability investors, and ESG investors all seek profitable investment products from brands that impart positive change.
If you’re looking for an investment fund that aligns with your values and aims to beat the market’s average ROI, look no further than the Aspiration Redwood Fund (REDWX). Combining the best parts of traditional investing values and climate-aware trading, the Redwood Fund contains a diversified array of brands making a positive impact on the planet.
With only a $10 minimum investment, low fees (Roth IRA accounts are free, and Traditional IRA accounts cost $15 annually), and no big-bank middlemen, the Aspiration Redwood Fund makes investing accessible and impactful.
Forbes. An Introduction to Impact Investing. https://www.forbes.com/advisor/investing/impact-investing/
Harvard Business School. What is Sustainable Investing?. https://online.hbs.edu/blog/post/sustainable-investing
Forbes. Environmental, Social, and Governance: What Is ESG Investing?. https://www.forbes.com/advisor/investing/esg-investing/