ESG 2.0: ESG for Impact

As ESG reaches age 20, we propose a return to its foundational principles to create ESG 2.0: a more mature framework we call “ESG for Impact.” Our roadmap builds on lessons learned from ESG’s stepsibling, impact investing. With a focus on identifying investable opportunities with maximum societal impact, impact investing was often viewed as a concessional asset class for those seeking to blend philanthropy and investment. However, its original definition and goals, as articulated in two seminal convenings at the Rockefeller Foundation’s Bellagio Center in 2007, emphasized “profit-seeking investment to generate social and environmental good.” Over time, impact investing advocates have emphasized that the “profit-seeking” designation very much includes those investors targeting competitive, risk-adjusted market-rate returns.

With a lifespan three years shorter than ESG, impact investing has often looked with resentment at the perceived undeserved accomplishments of its older sibling. The domain of impact investing has faced a less turbulent life, relatively free of identity crises and counter-movements, but also one that falls short of its avowed potential. It never amassed more than a few trillion dollars in a niche of financial services and never captured the imagination of mainstream asset owners. As a result, its goal to harness private capital markets to achieve the sustainable development goals remains largely aspirational. By combining forces at this moment, however, ESG and impact investing may be able to do more than either could alone. ESG 2.0: ESG for Impact can build on the momentum of ESG 1.0 with a stronger foundational logic but also a stronger disruptive spirit with the aim of system-level change.

The primer examines the limitations of ESG 1.0, including inconsistent ratings, weak links between sustainability data and financial materiality, and an overemphasis on risk avoidance. It also explores what ESG investors can learn from impact investing, including more rigorous impact measurement, deeper domain expertise, and active engagement with portfolio companies.

“Companies creating positive value for society gain advantages, while those causing harm face increasing costs and challenges—but only when information is transparent and stakeholders can hold companies accountable.”

Download the ESG 2.0: ESG for Impact Primer to explore our proposed framework that integrates robust impact measurement with mainstream financial analysis.