Philanthropy, impact and responsible investing: what are the differences?

As investors, we have become more cognisant of the impact that our investments could have on the world. It mirrors the greater societal awareness that our actions have an effect on others, including future generations.

This has given rise to the increased popularity of responsible investing, an umbrella term for any investment decision which considers environmental, social and governance alongside an investment’s potential financial return.

Exploring the responsible spectrum

The different forms of responsible investing lie across a spectrum with different balances of financial return and social or environmental return. That’s why lots of different terminology exists with the space, including:

• Philanthropy
• ESG and responsible investing
• Impact investing
• Sustainable investing

What are the main differences and which approach of investing for good is right for you?

1. Philanthropy

At one end of the spectrum is philanthropy. The act of donating money or other resources to a cause or organisation that you care about. This can be on a small or a large scale, from small charitable donations to larger commitments. One example from the recent news is Prince William's commitment to build social housing on the Duchy of Cornwall’s 130,000-acre estate. What defines philanthropy is the motivation to do good, and it does not necessarily require a financial return.

At the other end of the spectrum are processes of investing that seek to maximise financial return while considering non-financial factors that could influence the success of that investment. This is often simplified to just three letters – ESG. This is the integration of Environmental, Social and Governance factors, focusing on how a company conducts its business, rather than only considering what it does.

2. ESG factors and responsible investing

ESG analysis is the mechanism to carry out a responsible investment strategy, and to some degree all diligent investors should be taking due regard to non-financial factors that might impact their holdings. As a baseline minimum, considering the material ESG findings alongside the risk and opportunity of an investment can be considered a responsible approach.

In addition, responsible investors are typically also expected to be stewards of the assets they invest in by raising issues and voting on matters. However, utilising specific ESG factors, or going beyond them, to fulfil certain criteria or to deliver on specific and measurable positive outcomes is where we start to move further along the responsible spectrum.

How can you become a responsible investor?

3. Impact investing

Impact investors typically invest in businesses or organisations working to address social or environmental problems. Depending on the investor and process, their motivation and goals may be primarily philanthropic or predominantly investment led. Financial return is in most cases still expected from impact investing, but it is not necessarily the primary goal. This is in contrast to sustainable investing, which generally seeks to generate financial returns while minimising negative ESG impacts.

For impact investors it is very important there is a tangible and measurable positive outcome to the investments they make. Some examples might be the upgrade of buildings to better emissions standards, the provision of small loans to small businesses in developing countries, or funding renewable energy to help to reduce our reliance on fossil fuels and combat climate change.

4. Sustainable investing

Sustainable investments are generally chosen on the basis of their economic activities (what they produce or what service they deliver) and on their business conduct (how they deliver their products and services). More broadly, sustainability means meeting the needs of the present without compromising the needs of future generations.

It is important to note that these are just general descriptions, and there can be overlap between the terms. For example, some sustainable investors may also be willing to accept lower financial returns in order to achieve ESG objectives or metrics.

In summary

Philanthropy, impact investing, sustainable investing and responsible investing offer different ways for money to make a positive impact on the world. However, they are all at different points on the spectrum of approaches available, and there are some key differences between them.

Ultimately, the best way to choose between them is to consider your own personal values and goals. If you are primarily motivated by a desire to do good, then philanthropy may be the right choice for you. If you are looking for a way to generate financial returns while also making a positive impact, then impact investing may be worth considering. And if you are concerned about the environmental and social impacts of your investments, but still wish to maximise returns, then responsible or sustainable investing may be a good fit.

Looking for investment ideas? Follow the link to find responsible investments on our Preferred List.

Please note: This article was released prior to SDR and thus the information may not be in line with the Anti-Greenwashing rule but contextually is appropriate for the time it was written.