Global environmental, social, and governance (ESG) funds have roughly $3 trillion in total assets, according to Morningstar data. Most of these funds exclude investments in non-ESG businesses, such as oil and gas companies or weapons manufacturers—others weight companies based on their emissions, board representation, or other factors.
Unfortunately, these ‘exclusionary’ strategies don’t necessarily achieve positive ESG outcomes. For instance, ESG trends encouraged many oil and gas companies to divest dirty assets to private equity companies that don’t have strict reporting requirements. As a result, these oil and gas projects could do more harm than before.
Impact investments go beyond avoiding harmful investments to actively seek out investments to solve specific problems like climate change or social injustice. For example, an impact investor might invest in a portfolio of solar fields across the U.S. to promote the transition to renewable energy or affordable housing developments to address inequality.