What’s the difference between “impact investors” and “ESG integration investors”?

In this note, Nawar Alsaadi explains the difference between “impact investors” and “ESG integration investors” and provides us this nifty chart:

I have created this chart to highlight the difference between impact investors and ESG integration investors in terms of capital allocation data points. Although, both parties evaluate the same data, impact investors tend to overweight sustainability outcomes while taking in consideration financial outcomes. On the other hand, ESG integrators overweight the financial outcomes resulting from a given company sustainability strategy both at the company level and portfolio level. Impact investors optimize for sustainability outcomes, while ESG investors optimize for financial outcomes.

In most cases, the capital allocation between these two strategies should align, but there are instances where impact investors may overweight a factor that might reduce short term returns in favour of a longer-term sustainability outcome, or an ESG investor may over allocate capital to a sector where the financial return on a sustainability investment is higher as supposed to a better or larger sustainability outcome somewhere else. Knowing where you stand as a sustainability investor (impact or ESG integration) will have tangible consequences as to your capital allocation strategy. Having said that, if we are to address the systematic sustainability challenges we face, we need to favour impact over ESG integration.