Sygnia co-founder Magda Wierzycka was recently quoted in Business Day as saying ESG was “largely meaningless” – favouring, rather, impact investing.

She made her comments at the Investment Forum 2021.

This is an important discussion to be had by all businesses that have woken up to the reality of a shared world in which ‘taking’ from communities and the environment should be weighed against ‘investing back’ into communities and the environment, alongside expected investor returns.

At the core of Wierzycka’s argument is, essentially, greenwashing – the concern that ESG investing is more about marketing and presenting yourself as the most investible company in terms of following environment principles and objectives set by the UN or good governance. “But this should be a standard of any company. For us it is all about impact investing rather than ESG investing, which is actually largely meaningless,” she said.

This is a debate that needs to be had. The sad truth is that ESG investing is indeed often abused mainly for marketing purposes by unscrupulous, PR-driven corporations. The stampede of some players in the financial community to rebrand themselves as ESG-focused could seem alarming and overwhelming to anyone who has not seen the last financial markets fad or fashion, or the one before that. As product development departments of asset management firms and the Investor Relations (IR) units of listed companies work hand over fist, it seems, to slap green onto anything that goes out the door, scepticism remains about the degree to which the processes and purposes of ESG focus has actually been integrated into the way business is done.

Wikipedia defines impact investing as investments “with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.” Another definition from a prominent ESG service provider defines ESG investing as “an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business.”

One might be forgiven for thinking that there is not too much difference between those two definitions. In actual usage – though with many contradictory examples, given such broad categories – impact investing tends to refer to investment into specific projects or companies targeting from the start to achieve a positive social or environmental impact.

ESG investing, meanwhile, tends largely to focus on investment in line with ESG considerations, into entities which may or may not have such goals.

The dichotomy between impact investing and ESG investing might work in one narrow context: when ESG is used as a purely negative screening criterion. In other words, when investors attempt to do no harm, but do not necessarily look to do any environmental, social, or governance good. This is certainly one way to approach construction of a portfolio of ESG investments, especially if you are an asset manager looking to create a cheap, low-fee ESG Exchange Traded Fund (ETF).

But it is certainly not the only one, and it still requires the underlying companies, bonds, or other investable entities to actually do the work of improving their sustainability footprint. Those numbers will need to be there for anyone who wants to look deeply enough into the portfolio, and so the net result should still be an improvement in sustainability.

A lot of the debate between the two related disciplines comes down to those metrics and measurement considerations. Wierzycka’s warning that “If all you’re relying on is positive screening for good behaviour, that really is going to have a minimal impact on things such as climate change and positive returns,” may be true as far as it goes, but credit must also be given to the proportion of ESG investors not relying just on positive screening. In many cases, they are not only selecting which horses to back, they also exercise influence at boardroom level as major shareholders whose choices matter to their investees. The recent headlines on Exxon Mobil Corp.’s capitulation to ESG-focused activist funds is just one example.

ESG investing critics and sceptics have often cited the plethora of confusing, and sometimes conflicting, standards for ESG investment. (A recent report by the Global Reporting Initiative identified 614 different sustainability reporting requirements and resources.) Yet if there is any confusion or conflict between standards, it looks to be driven by enthusiasm, or urgency, rather than underlying uncertainty and incoherence about what is being measured by these standards.

In South Africa there is King IV; in the European Union there is now the Sustainable Finance Disclosure Regulation, touted as “Another Step Towards An ESG-Driven Economy.” Then there are the Sustainability Reporting Standards promulgated by the International Financial Reporting Standards Foundation, which is already seeking heads for the proposed new International Sustainability Standards Board.

This month, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) officially announce their merger to form the Value Reporting Foundation, bringing together two more key players in the area. Furthermore, both of these organisations had already committed to work with other standards-setting entities such as the Global Reporting Initiative, the Climate Disclosure Standards Board and the Carbon Disclosure Project. Last, but by absolutely no means least, there is the United Nations Sustainable Finance Goals, whose SDGs acronym and colourful maps of the 17 goals have become instantly recognisable.

All those initiatives are not necessarily going in a different direction to impact investing, especially because impact investing doesn’t come free of the same benchmarking and metrics problems as ESG investing. The fundamental question for both investment approaches is: how much have you done?

If you are an impact investor and don’t have a way to measure the impact of your investment, then you’re no better off than an investor in ESG propositions who has no way of measuring the environmental, social, or governance outcomes of their investment. An investor has to be able to demonstrate that a better sustainability result has been achieved after their investment has been made. Otherwise, the accusations of greenwashing could turn out to be all too accurate.

No one can reasonably argue with Wierzycka’s assertion that “you need to move into looking at opportunities which genuinely do good and have the potential to change the world.” In the end, it is all about how far one goes. Potential is great for the future. But just as good, or better, is change in the present, right here, right now. Impact investing evolved in the context of development finance. It still has a leading presence there and should continue doing so, also growing into other areas. ESG investing carries that added benefit of obvious and seamless integration between financial processes and business processes, the kind that some refer to as the “real” economy, versus the financial markets.

The pressure on investors to go one way or the other, and the plethora of standards instanced above, graphically demonstrate that there is no getting away from this for businesses and investors alike. Ultimately, the imperative for any company or investor worldwide is going to be: comply or die. That may be a fundamental environmental survival calculation; it certainly is going to be a corporate or financial one, as well as a brand/corporate reputation marker. And probably investors and businesses need to find their ways to it by whatever means suits them best, impact or ESG.

As Tulio and Miguel said, “Both. Both. Both is good.” That sounds like a real road to El Dorado.

Solly Moeng is the founder and Convenor of Africa Brand Summit. Join his conversation in “I’m so solly” by clicking here.