PitchBook blog

Your resource for all things PitchBook
Impact Investing

The key differences between SRI, ESG and impact investing

In recent years, ESG as a term has popularly become synonymous with sustainable investment, but ESG is a framework for evaluating companies and not a standalone investment strategy.

As sustainable investing continues to mature and generate greater interest from private markets, further definition of key concepts can bring clarification to the opportunities in this important space. Despite the popularity and significance of impact investing, confusion around terminology has hindered uptake, especially in the US.

Major categories under the broader umbrella of sustainable investing include socially responsible investing (SRI); environmental, social and governance (ESG) risks; and impact investing—each with its own specific characteristics and applications.

The sustainable investing ecosystem

Socially responsible investing (SRI)
  • Investors use screening and exclusion, divestment, positive reinvestment and shareholder activism to achieve positive social or environmental outcomes
  • Most commonly used in public markets, easily accessed by all investors
Environmental, social, governance (ESG) risk factors
  • Metrics by which to measure a company's risks outside of a financial accounting framework
  • More public market funds are incorporating this framework, though private market participants are beginning to as well
Impact investing
  • Investing in companies and funds with an eye toward both financial returns and measurable social and/or environmental impact
  • Prominent in private market investments, limiting access for smaller investors

What is socially responsible investing (SRI)?

Socially responsible investing started largely in the public markets and could be accessed through SRI mutual funds, which were the first investment products to emphasize responsible investing. These funds commonly use screening and exclusion to avoid investments in companies that might have negative social or environmental exposures.

For example, a typical SRI strategy would exclude companies that produce things like tobacco, firearms or alcohol from a portfolio of public equities. Though a number of investors in the 1990s considered SRI strategies, many ultimately decided investing from a values perspective was not their mandate and continued to construct portfolios the way they always had.

What are environmental, social and governance (ESG) factors?

ESG refers to a framework or set of criteria used to evaluate a company’s environmental, social and governance risks and practices. Data related to these factors can be useful in analyzing the ultimate worth of a company—just because a risk exists does not mean one should avoid it, it just means that the price should reflect it.

Like SRI, the consideration of ESG factors began in public equities as investors sought a framework to consider risks to sustainability. The framework also considers risk factors that don’t lend themselves to financial statements but are material to the sustainable operation of a company.

Poor governance (G), for example, could lead to decisions that cause worker strikes (S), which could interrupt safety protocols and lead to an environmental disaster (E). Thus, a shortsighted decision can lead to consequences that were completely avoidable.

What have been some hurdles to the adoption of ESG?

Early on, some investors mistakenly believed that ESG was just an extension of the more values-based SRI and ignored the new field. The global financial crisis further challenged the adoption of ESG in the US as other issues were prioritized in a turbulent market, though the framework had seen earlier uptake in Europe that continued through the GFC.

Why are more firms paying attention to ESG now?

Over the last decade, ESG has gained more attention in the US as investors have come to recognize the materiality of risks that lie beyond the typical financial statement analysis. For example, if a company is more profitable because it doesn’t properly dispose of toxic waste, there is a legal risk associated with this negligent behavior. Another example would be improving margins by paying so poorly that workers can’t make a living wage, invoking social risks with potential consequences such as strikes or government interference.

When put into examples this plain, it seems obvious that an investment manager would be breaching its fiduciary duty by ignoring these risks, yet this framework is still a fairly new perspective for most US investors. Further, European regulators and the CFA Institute have named ESG risks as something that ought to be considered as part of a fund manager’s fiduciary duty, views that will likely lead many more products to meet a voracious ESG appetite.

What is impact investing?

Impact investing is a strategy of investing in enterprises, organizations and funds that seek to create both financial returns and measurable social and/or environmental impact. Investors who seek financial gains and impact refer to this as the “double bottom line,” mimicking an accounting term to express how both aspects need to be measured and reported.

Impact investments are most commonly made through closed-end PE and VC funds, with debt funds gaining popularity more recently among impact investors.

The difficulty of tracking “impact” is one issue that challenges perceptions of the field. Some uncertainty has remained around what exactly classifies as having a positive impact. As definitions vary and investors often track outcomes with unique metrics based on their own specific goals, there are some differences from investor to investor.

Here are a few examples of how impact investors might track outcomes for specific funds.

Select impact themes and sample metrics

Impact themeSample metric
Access to essential services (financial services, healthcare, education)
  • # of individuals with bank accounts
  • # of patients served
  • # of students enrolled
Quality jobs, income generation
  • # of jobs created
  • Average income created
  • Employee demographic
Affordable housing, infrastructure development
  • Units of developments completed
  • # of individuals housed
Women’s empowerment
  • % of portfolio companies or investment funds founded or operated by women
Environmental sustainability
  • # of trees planted
  • Reduction in greenhouse gas from product or service

How is impact investing different from ESG?

In recent years, ESG as a term has popularly become synonymous with sustainable investment, but ESG is a framework for evaluating companies and not a standalone investment strategy. Impact is about the type of investments a manager is targeting, while ESG factors are part of an investment assessment process. Further, impact investing is seeking to make a measurable positive environmental/social effect with the investments a fund manager buys while ESG is an approach to identifying non-financial risks that may have a material impact on an asset’s value.

How is impact investing different from SRI?

Unlike socially responsible investing, impact investing is seeking positive impactful attributes in which to invest rather than screening out perceived negative attributes. Impact investing most commonly takes place in the private markets while SRI is typically practiced in publicly traded vehicles.

What are some major firms involved in impact investing?

TPG, KKR and Bain Capital have already launched impact funds and Goldman Sachs, US Bank and UBS have each added an impact investment platform to their asset management practices.

What are some notable impact investment vehicles?

Here are just a few select impact investing funds that help illustrate areas of impact, range of committed capital and what types of firms are involved.

The Rise Fund

General partner
TPG Growth
Area(s) of impact
Education, energy, food and agriculture, financial services, healthcare, information and communication technology, industrial and infrastructure

Macquarie SBI Infrastructure Fund

General partner
Macquarie Asset Management
International Finance Corporation
State Bank of India
Area(s) of impact
Indian infrastructure

Climate Change Capital Carbon Fund

General partner
Climate Change Capital
Area(s) of impact
Clean energy and the low carbon economy

Bain Capital Double Impact Fund

General partner
Bain Capital
Area(s) of impact
Maximizing financial potential, scaling social and environmental impact

Green Triangle Forest Trust

General partner
New Forests
Area(s) of impact
Sustainable forest management

Enterprise Housing Partners

General partner
Enterprise Community Partners
Area(s) of impact
Low-income housing

Turner-Agassi Charter Schools Facilities Fund

General partner
Turner Impact Capital
Agassi Ventures
Area(s) of impact
Development of US schools in high-need areas

TVM Healthcare MENA

General partner
TVM Capital Healthcare Partners
Area(s) of impact
Investments in healthcare companies focused on Southeast Asia and the MENA16 region

Looking for resources that can help you make and track impact investments?

PitchBook tracks millions of companies (within 50+ verticals) and hundreds of thousands of investors, including those involved in impact investing. To help our clients find fitting investments or track investor activity in this field, we’re making it easier to search specifically for investors and funds that seek impact investments as well as companies that are likely to have positive social and environmental effects.

As the appetite for sustainable investment continues to increase and companies further emphasize social/environmental impact, our analysts expect more and larger impact funds in the coming years—with more major alternative asset managers likely to enter the space.

Read more on SRI, ESG and impact investing

The Double Bottom Line: Private Market Impact Investment
This report offers a holistic overview of the sustainable investing ecosystem including a framework for understanding impact measurement and investment strategies.

Impact Funds by Reason and Region
This report examines the impact space at another level of granularity, breaking fund data down by the many IRIS+ categories of impact.

ESG and the private markets
This report offers a holistic overview of the sustainable investing ecosystem including a framework for understanding impact measurement and investment strategies.

2021 Sustainable Investing Survey
This report showcases the results of our sustainable investing survey, providing perspectives from LPs, GPs, and service providers across the ecosystem.