Socially responsible, ESG, and impact investing

Socially responsible investing (also known as SRI) and ESG investing (also known as environmental, social, and corporate governance investing) are quite similar to impact investing, but there are some subtle differences between them.

SRI can involve excluding investments that conflict with the investor's values. This is a simple way to screen for investments since an investor primarily interested in preserving the environment might exclude any company that makes money by promoting fossil fuel consumption. Conversely, SRI also can promote the inclusion of companies that match the investor's values — for example, renewable energy companies.

ESG investing involves analyzing companies to figure out if they adhere to specific metrics. These can include environmental data (greenhouse gas emissions), social data (employee turnover), and governance issues (total executive compensation). A deep dive into a company's balance sheet, as well as its underlying culture, is often required when it comes to ESG investing.

Impact investing is closely related to, but slightly different than, SRI and ESG investing. Impact investing focuses specifically on the relationship between the investor's capital and the positive, measurable impact that certain investments may have. In some cases, profits can be a secondary priority, depending on the desired impact. For example, impact might be measured by a reduction in disease, an increase in sustainable food production, or an attempt to correct societal ills that public services have been unsuccessful in addressing.

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Animation: 2021 real estate investment managers Video from Pensions & Investments
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Unicorns
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Back in 2015, Fortune published a cover story on the soaring number of “unicorns,” or pre-IPO startups valued at $1 billion or more. At the time, there were more than 80 such private companies. That figure seems quaint today. According to the latest data from startup-tracker CB Insights, there are now 832 unicorns globally, including 416 in the U.S.

The pace of unicorn creation has been accelerating, too, as flush venture capital investors compete for stakes in the most innovative companies: A total of 136 startups achieved unicorn status in Q2 of 2021 alone, more than in all of 2020.

Harvard Management Company announced that its endowment portfolio returned 34% for the year ending June 30, 2021, with $18 billion in private equity investments accounting for annualized investment gains of 77%.

The $53 billion Harvard University endowment also saw stellar gains for public equity investments, which were up 50% over the same time frame, according to HMC’s newly released annual report.

The largest allocations in the portfolio are to private equity and hedge funds, which account for 34% and 33% of total assets respectively. Hedge funds were up 16% for the year.

Private equity exits are on fire as rapid economic growth and strong markets fuel an already historic year for firms and portfolio companies.

PitchBook’s Q3 2021 US PE Breakdown illustrates an astounding run for PE exits as 2021 year-to-date exit value is already 50% larger than the next-highest annual figure, and currently estimated to top $638 billion through Q3. Additionally, 1,129 exits are estimated to be completed through Sept. 30.

ESG investing now makes up more than one-third of private capital under management with an estimated $3.1 trillion committed, according to a Preqin report issued Wednesday.

According to Preqin's ESG in Alternatives Report 2021: Navigating the Climate Crisis, that represents 36% of $8.52 trillion of private capital under management globally.

The highest rate by asset class is private debt, with 49% of assets committed to ESG, while infrastructure managers had the lowest rate at 31% of assets, the report said. By assets, private equity led, with $1.82 trillion focused on ESG funds.

Preqin estimates that ESG-committed managers raised $403 billion in the first nine months of 2021, compared to $506 billion raised in all of 2020.