Quantifying the Impact of Impact Investing

Abstract

We propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing (SRI), environmental, social, and governance (ESG) objectives, and other non-financial investment criteria. We derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor-Black portfolios to maximize the risk-adjusted returns of impact portfolios, we propose a quantitative measure for the financial reward, or cost, of impact investing compared to passive index benchmarks. We illustrate our approach with applications to biotech venture philanthropy, semiconductor R&D consortium, divesting from "sin" stocks, investing in ESG, and "meme" stock rallies such as GameStop in 2021.

Keywords: Impact Investing, ESG Investing, Socially Responsible Investing, Venture Philanthropy, Investments

JEL Classification: C10, C20, G11, G12