Impact investing involves making an investment with the intention of generating a positive social or environmental impact in addition to a financial return, usually but not always a market-rate return. One of the oldest forms of impact investing is community investing, whereby deposits are made at community development financial institutions (regulated banks or credit unions with FDIC insurance). Those deposits are used by the institution to make loans in low income communities that support home ownership and the creation of new businesses, thus helping to revitalize the community. Microfinance lending is another form of community development, typically practiced in low-income countries. More recently, venture capital and private equity investments are being made in start-up companies whose purpose is to create some sort of societal benefit (and if done successfully, generate profits); examples include solar-charged lanterns and water purification systems that are being sold in the developing world. Impact funds pool several such investments in order to provide easier access and greater diversification to investors.

Responsible investing can be thought of as aligning one’s values or religious beliefs with one’s investments. The most common way this is pursued is through negative screening – excluding certain companies or industries from a portfolio because of the products or services those companies provide. Common investment screens prohibit investment in tobacco companies, weapons manufacturers, or heavy polluters. These decisions are not made to drive investment performance, but rather to ensure one is not supporting (through investment) or benefiting (through dividends, etc.) from activities they consider unethical or immoral.

Thematic investing entails focusing investments on particular megatrends, such as climate change or population growth, or on specific issues such as gender diversity or natural resource scarcity. Portfolios may be well-diversified, for example investing in companies across all industries that are doing a better job managing climate change risk than their peers, or companies that have better female representation within senior leadership and on their boards of directors. Thematic portfolios may also be more narrowly focused, such as seeking out companies that offer solutions to particular problems like water scarcity, unsustainable agricultural practices, or health challenges. Investors, including religious investors, may pursue thematic investing in order to invest in companies that place emphasis on important issues such as human rights, community involvement, or payment of a fair living wage. 

Contrary to responsible investing, the incorporation of environmental, social, and governance (ESG) analyses into the investment decision-making process is done in order to make better, more well-informed decisions with the aim of improving risk-adjusted returns. ESG integration begins by identifying which ESG issues are material for each company, that is, which non-financial factors are likely to have a financial impact on the company, either positively through improving competitive advantage, or negatively through poor risk management. The next step is to assess the company’s performance on those ESG issues, both over time and relative to peers. Such an analysis can provide additional insights about a company’s efforts to improve productivity, increase efficiency, reduce costs, and grow profits, all of which are likely to benefit investors.