When investing in a financial security the primary intention of the investor is to generate a positive return. When engaging in impactful investing, however, investments are made with the intention of generating a positive and measurable social or environmental impact alongside a favorable financial return. Investors seeking to make an impact typically follow the socially responsible investing (SRI) and/or environmental, social, and governance
.
What influences investors?
Individuals who
invest in sustainable securities are driven by both financial gains and the possibility of achieving a beneficial impact. When making individual financial decisions, investors must typically be confident in their understanding of the risks involved as well as the characteristics of the investment security. Investors are largely affected by two sources. To begin with, investors may select a sustainable asset based on personal motivation relating to the
desired impact and/or degree of return. Secondly, due to the high reliance on
top-down information sharing relating to ESG and the outcomes of impactful investing, investors are also heavily influenced by companies and government bodies, with the quality of information having a significant impact on how investors interpret ever-changing social and environmental concerns.
Impactful investment choices?
While impactful investing is comprised of two primary factors: financial returns and positive change, these two components are not necessarily equal. Investors may
prioritize elements, depending on personal goals and preferences. When focusing on
reducing negative impacts, investors typically look towards securities or specific companies that are aiming to improve the world in a way that aligns with personal preferences or having the largest impact. However, determining who is doing the most good may be challenging. When evaluating the impact of a firm, it is also important to take other factors such as industry and management models into account, as a firm’s
risk level towards ESG may be greatly skewed by these factors.
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