Impact Investing isn’t ESG

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The terms “impact investing” and “ESG” (Environmental, Social, and Governance) are not synonyms. The investments Realize Impact does through its philanthropic investment grants (PHIGs) and the investment touted on The Liist are impact investments, with and without regard to ESG.

Stanford University’s SSIR explains the history of the two terms and tries to define them, but makes the difference sound overly complex.

Simply put, ESG measures how a company operates while impact measures what a company does.

For example, PepsiCo (the makers of Pepsi, Gatorade, and Cheetos) is one of the top-scoring companies as measured by ESG. Yet no one claims any of its products have a positive impact on society or the environment. Other high scoring ESG companies include Verizon, Apple, and PayPal.

Compare them to Whole Foods, which brought organic and local food to their own stories, but made such products commonplace at Krogers, Safeway, and even Walmart. Whole Foods’ ESG score is insignificant compared to the actual impact they had in the world. On the ESG side, prior to being acquired by Amazon, Whole Foods was also known for treating their employees well, paying higher-than-average salaries, and caring about the environment.

The unfortunate fact is that if you look through the list of public companies, you’ll find a significant number with high ESG scores but very few that have an actual positive impact, whatever your scale of impact. Impact investing is a relatively new idea and nearly all of the hundreds of thousands of “mission driven” companies focused on impact are too small to be publicly listed.

Which is why impact investing is primarily still reserved for high-net-worth (a.k.a. “accredited”) investors, or for anyone who discovers PHIGs, which lets anyone be an impact investor.