The previous article: “Green Investors: Taiwan sets up a green investment bank, just like Virgo encounters Aquarius, no play!” we talked about impact investment and how private equity funds might become one of the largest drivers behind the growth of impact investment. Before we expand this, let us go through some of the terms that are commonly thrown around.
- Corporate Social Responsibility (CSR)
- Environmental Social Governance (ESG)
- Green enterprise
- The Principles for Responsible Investment (PRI)
- Socially Responsible Investment (SRI)
- Green Investment
- Impact investment (II)
With these many terms, it can be quite confusing! What are the similarities and differences?
Among the various terms, the single most important similarity that linked them all is “Sustainability”. These concepts are fundamentally against the idea of Milton Friedman’s doctrine of maximizing profits as long as it engages in open and free competition without deception and fraud. Corporate Social Repsonsbily, Environmental Social Governance, Social Responsible Investment and Impact Investment believe businesses should be more than just profit seeking entities and focus on long term sustainability of their businesses, the environment and social groups affected by these business entities.
What are the differences then? There is no universally accepted definitions but let me share my definitions on these terms and hopefully they make some sense to you.
CSR is a set of expectations or activities that corporates should do in order to be considered a ‘Good Corporate Citizen’ and based on the simple belief that corporates need to partake in good corporate social activities such as saving energy, encouraging social entrepreneurship and sponsoring charitable events.
ESG, on the other hand, is more comprehensive and longer term. ESG looks into ethical behavior of the corporate in the areas of environmental impact, social impact and governance. It focus on the core characteristics of the corporate decision making mechanism. Is the corporate considering the environmental impact and social impact when planning a new factory? Does the company’s board has a governance mechanism to manage these environmental and social considerations?
SRI is an investment strategy that considers both financial return and social/environmental objectives and typically avoid investment in areas where it considered to be “sin” sectors. SRI is investing with a conscience.
Impact investment evolves further from SRI (moving from avoiding negative sectors to investing into positive sectors) and focuses on making investments into companies with the intention of generating specific and measurable social and environmental impact alongside financial returns.
In a relatively simple terms, CSR and ESG are concepts used to differentiate corporates while SRI and impact investment are investment strategies. It is also fair to say that CSR is the “older” concept while Impact Investment is the “newer” concept that builds on CSR, ESG and SRI and the evolution that sustainability need to be measured in order to have greater impact. It also similar to individual upbringing. You started out by having good habits, develop into having good judgement (act in good faith), avoid negative actions before focus on making positive actions. It is an evolution on the level of impact you are making to the world.
If you are still thinking that impact investment is part of the company’s CSR practice then you need to re-read this article from the start! They are somewhat mutually exclusive but very related concepts so don’t feel bad if you don’t understand it completely.
In the next article, we will talk about how we can match impact companies and impact investments, and what kind of investors are looking at to participate in impact investments.