Investors have long held the assumption that Environmental, Social, and Governance (ESG) and impact investing are the same, but that’s simply not the case. While they hold many similarities, there are also stark differences between the two.
We highlight the differences between ESG and impact investing, while diving into why impact investing is now more than just a ‘nice-to-have,’ it’s an imperative strategy with long-term implications for investors, impact enterprises, and nations everywhere.
ESG vs. Impact Investing: What’s the Difference?
With its roots in socially responsible investment (or SRI), ESG was coined in 2004 by the United Nations, the International Finance Corporation (IFC), and the Swiss Government to put ESG issues front and center in mainstream investments. Governments were the main drivers of progress in social and environmental investing, with the U.S. catching on in 2011, so ESG was created to weave in private capital in these investments.
Three years later, the Rockefeller Foundation, along with philanthropists, investors, and entrepreneurs, coined the term ‘impact investing’ to put a name to investments that aim to generate tangible social impact along with financial returns.
Looking at the difference between the two, ESG is more of a framework, while impact investing is a strategy. While ESG tends to be retrospective by measuring the outcomes of business activities, impact investing looks ahead, defining the types of investments an investor might target. What makes impact investing stand out is its alignment with the United Nations (UN) Sustainable Development Goals (SDGs), measuring performance against stated global objectives, and holding investors accountable.
Impact Investing: Why Now?
This is where governments can come in to boost incentives for impact investing or allocate catalytic capital to de-risk projects. Private-sector players, particularly corporations with strong gender equality and ESG agendas, can also add to the potential resource pool to invest in impact enterprises. Together, these partnerships can play pivotal roles in mainstreaming the valuation of impact as performance and strengthening enterprises that contribute to actual financial and economic outcomes.
Knowing what we know about impact investing, why should investors apply it in their investment strategies? Looking at the bigger picture, Blue Orchard states that there is an investment need of US$5 to 7 trillion per year just to fulfill the UN SDGs by 2030, with the financing gap in developing countries being US$2.5 trillion.
Over the years, ESG has proven that it works, but it’s clear that it can’t tackle the world’s most pressing issues alone — mobilizing private capital is crucial to ensure that we achieve the UN SDGs.
Companies are starting to recognize this. Take Impact Investment Exchange (IIX) as an example. For the past 16 years, we’ve mobilized nearly US$ 500 million in capital, impacting over 155 million lives across Asia and South Africa.
Pioneering the Impact Investing Landscape
Given the impact IIX has made over the years, it’s proof that impact investing outperforms ESG. The market for impact investing has grown exponentially to US$ 1.57 trillion in 2024, representing a 21% compound annual growth rate (CAGR) since 2019.
For 16 years, IIX has led the charge in impact investing, setting up the world’s first social stock exchange in 2009 and moving impact investing from the margins to mainstream finance.
Going beyond ESG, IIX’s Women’s Livelihood Bond™ (WLB) series has mobilized over US$228 million for women-focused, climate-resilient enterprises. Our Impact Partners™ platform has connected investors to enterprises, unlocking over US$225 million for purpose-driven SMEs across the Global South.
And we’re not doing this alone — through the Orange Movement™, we’ve gathered over 285,000 signatories, impacting over 2 million lives, and mobilizing over US$374 million in capital. We are living proof that impact investing has outgrown its ‘nice-to-have’ label; it’s crucial to building a more sustainable world.
As IIX continues to lead the charge, we invite you to join us to make change happen — let’s go beyond conversations and take action together. Email us at info@iixglobal.com and let’s make impact happen.