Impact and ESG Investing: Best Choice for Millennials?

Millennials wanting to make a positive impact face a choice: ESG investing, which considers environmental, social, and governance factors, or impact investing, which directly targets companies creating social or environmental good. This article dives into the goals of each approach to help you pick the one that best aligns with your values.

The difference between ESG investing and impact investing

As the world becomes more conscious of the need for sustainable practices, two investment approaches have gained significant traction: ESG (Environmental, Social, and Governance) investing and impact investing. While both aim to promote positive social and environmental outcomes, their core objectives and methods differ.

ESG investing, also known as sustainable or responsible investing, involves integrating environmental, social, and governance factors into the investment decision-making process. Investors look at a company’s performance across these three areas to find organizations that practice responsibly and reduce risks related to ESG issues. ESG investing primarily aims to generate financial returns while considering the broader societal and environmental impacts. However, as Nancy Pfund, founder and managing partner of DBL Partners, points out, ESG often focuses on excluding companies with poor scores. While this helps manage risk and ensure standards are met, it doesn’t actively address urgent challenges.

In contrast, impact investing takes a more targeted approach. It involves actively seeking investments that create measurable, positive social or environmental outcomes alongside financial returns. Impact investors prioritize addressing specific challenges, such as climate change, poverty, or access to healthcare, by investing in companies or projects that directly contribute to these causes. Here, the primary focus is on creating tangible, positive impacts, with financial return often being a secondary consideration.

In summary, while both ESG and impact investing aim to foster a better world, they do so in different ways. ESG investing focuses on responsible practices and risk management, whereas impact investing is all about making a direct, positive difference.

Benefits of ESG investing for millennial entrepreneurs

ESG investing offers several benefits for millennial entrepreneurs aligning their business practices with sustainable principles. With 95% of millennials interested in sustainable investing and 67% participating in at least one sustainable investment, it’s clear this approach resonates strongly with younger generations. Additionally, 6 in 10 millennials report that Covid-19 has increased their appetite for ESG investing.

1. First, adopting ESG practices can enhance a company’s reputation and attract investors and customers who prioritize sustainability. This can lead to more investment opportunities, greater customer loyalty, and a competitive advantage in the market.
2. Second, by integrating ESG factors into their decision-making processes, millennial entrepreneurs can identify and mitigate potential environmental, social, and governance risks. This proactive approach helps prevent legal liabilities, regulatory penalties, and reputational damage.
3. Third, companies that embrace ESG principles often show better long-term financial performance. They are better equipped to navigate evolving regulations, adapt to changing consumer preferences, and foster a positive corporate culture that attracts and retains top talent.
4. Finally, for many millennial entrepreneurs, sustainability and social responsibility are not just business considerations but personal values. ESG investing allows them to align their investments with their ethical beliefs and contribute to a better future for society and the planet.

Benefits of impact investing for millennial entrepreneurs

On the other hand, impact investing offers unique advantages for millennial entrepreneurs who are passionate about creating positive change. With 78% of investors aged 18-36 already involved or planning to invest in socially responsible and impact investments and 52% of millennial investors considering social responsibility an important factor, it’s clear that this approach resonates deeply with the younger generation.

1. First, impact investing allows entrepreneurs to drive measurable positive impact. By investing in companies or projects that directly address social or environmental challenges, impact investors can quantify and track the tangible outcomes of their investments. This direct connection to real-world impact can be deeply fulfilling for purpose-driven entrepreneurs.
2. Second, impact investing often supports innovative solutions and disruptive business models that aim to solve pressing global challenges. Millennial entrepreneurs can leverage this capital to develop and scale innovative products, services, or technologies that create positive change.
3. Third, impact investments contribute to developing sustainable industries and ecosystems, paving the way for long-term economic, social, and environmental progress. Millennial entrepreneurs can be pivotal in shaping this future by aligning their ventures with impact investing principles.
4. Finally, impact investing has given rise to a growing network of specialized investors, funds, and accelerators dedicated to supporting ventures with a positive impact. Millennial entrepreneurs can tap into these resources to secure funding and mentorship tailored to their impact-driven goals.

95% of millennials interested in sustainable investing

Factors to consider when choosing between ESG investing and impact investing

Millennial entrepreneurs should consider several factors when deciding between ESG investing and impact investing.

To begin with, think about your investment objectives. Determine whether the main goal is generating financial returns while considering ESG factors (ESG investing) or directly addressing specific social or environmental challenges (impact investing).

Next, consider impact measurement. Evaluate the importance of quantifying and reporting on investments’ positive impact. Impact investing usually requires more rigorous impact measurement frameworks.

Also, assess industry and sector alignment. Look at how well the chosen investment approach fits with the specific industry or sector in which the venture operates. Some industries may be better suited to one approach over the other.

Additionally, consider investor preferences. Think about the preferences and expectations of potential investors. Some prioritize ESG integration, while others focus more on direct impact generation.

Finally, evaluate resource availability. Check the availability of specialized resources supporting the chosen investment approach, such as impact measurement tools, impact-focused accelerators, or impact investment funds.

In conclusion, considering these factors will help millennial entrepreneurs make an informed choice between ESG and impact investing.

52% of millennial investors considering social responsibility an important factor

Choosing the best investment approach for millennial entrepreneurs

Ultimately, millennial entrepreneurs’ choice between ESG investing and impact investing will depend on their specific goals, values, and the nature of their ventures. As Scott Nance, Vice President of Impact Investing at Fidelity Charitable, emphasized, ESG investing offers a more mainstream approach by integrating sustainability into traditional investment processes. In contrast, impact investing takes a more targeted and intentional approach, focusing directly on specific social or environmental challenges.

ESG investing may be the more suitable option for millennial entrepreneurs who are primarily focused on generating financial returns while considering ESG factors. However, for those driven by a deep commitment to creating measurable positive change, impact investing may better align with their values and objectives.

It is also possible to adopt a hybrid approach, combining ESG and impact investing elements to create a comprehensive and holistic investment strategy. This can involve integrating ESG factors into decision-making while actively seeking investments that generate positive impacts.

Regardless of the chosen approach, millennial entrepreneurs should remain adaptable and open to evolving their investment strategies as the sustainable investing landscape matures and new opportunities and challenges emerge.