Sustainable and Impact Investing – What’s the Difference?

Sustainable investing and Impact investing are often confused as two sides of the same coin but there are some clear and important differences, explains Beth Houghton, head of Palatine’s Impact Fund.

Sustainability, responsible investing, Impact, ESG… the terminology involved in describing and evaluating the relationship between business and the environment/society has multiplied in recent years, due to a growing spotlight on investment ethics.

It’s understandable, then, that some confusion has arisen. In particular, I often see sustainable investing and Impact investing mistaken as the same thing. In reality for Palatine, they are quite distinct strategies, both of which are absolutely fundamental to our role as investors.

The difference is fairly simple.

A sustainable investment strategy focuses on how a company delivers its goods and services and what effect this has on the environment/society. This is identified and measured by looking at environmental, social and governance factors (ESG, for short). For many investors, ESG is a way of identifying non-financial risks that may have a material impact on a business’ value. At Palatine, however, we consider ESG to be an important driver of value enhancement across every business we invest in.

Impact investment, on the other hand, is the strategy of backing businesses whose core business activities and output have a measurable positive impact on the environment or society. For a business in the Impact Fund, we invest with the intention to look at how we can help accelerate and scale the management team’s vision for delivering positive social and environmental change, while generating returns for our investors. We call this: ‘Returns with purpose’.

Our approach to Impact investment

As traditional investors with a strong track record of returns, coupled with sustained success in integrating our ESG framework into our investment strategy, we sought to take our investment innovation one step further. In 2017 we pioneered a returns focused impact fund.  Since then we’ve invested in a wide range of businesses, from those supporting young learners or helping the long-term unemployed back into work, to a business developing new medicines and therapies, and a consultancy which is helping cities and large corporations tackle climate change – unquestionably the big issue of our time.

Our Impact Fund investments have to deliver positive social and environmental change, and we set targets to measure and demonstrate how and to whom they deliver this change during our investment period. For example, with an education company Estio Training, which we recently exited, one of the KPIs looked at how many people they trained from areas of high social deprivation.

From the outset of an impact fund investment there’s an intentionality there to drive the right outcomes. For instance when we invested in Anthesis it was with a clear intent to help cut carbon emissions across their global client base. Anthesis was specifically looking for an Impact investor – they wanted that alignment. When we sit around the table with their board we talk not only about how we financially grow the business but also how we grow its impact.

Having that sense of shared mission with their investor is really important to them. If Anthesis had gone to a more traditional investor that discussion would not necessarily be around climate change and its status as a B Corp. Instead it would be more squarely focused on business growth. Through the Impact Fund we can deliver both growth and positive social and environment outcomes.

Our approach to Sustainable investment

Sustainable investing is something we have been doing formally for more than 12 years, meaning we’ve established both experience and credibility in the market. As a result sustainability is a central part of our approach to value enhancement in our portfolio, through a comprehensive pre-deal-to-exit approach that enables material ESG matters to be identified, profiled, and managed.

At the outset of an investment, each company undergoes a baseline review based around our six-pillar ESG framework.  We ask a number of questions, such as: Are they limiting waste? What’s their wellbeing policy for staff? Are they looking in detail at their supply chains to make sure ethical practices are in place?

When the business becomes part of our portfolio, our investment and in-house sustainability team work collaboratively with the management team to set a strategy, agree KPIs and proactively manage ESG outcomes, while monitoring the effect ESG initiatives have on its financial performance.

We do this because our track record has demonstrated that sustainable businesses can be more profitable and resilient while supporting their own ecosystems, local communities and the planet to thrive.

Our investment in creative cocktail bar and restaurant The Alchemist is a good example of the differences between sustainable and impact investment. While it could not be categorised as an Impact company, The Alchemist has grown to become a leading sustainable business within its sector because of the way it looks after its people and communities and the strong environmental improvements it has made to being a carbon neutral business. These achievements have been driven by channelling the vision of the management team into a robust ESG strategy since they joined the Palatine portfolio.