Quantifying the Impact of Impact Investing

69 Pages Posted: 18 Oct 2021 Last revised: 19 Apr 2022

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Ruixun Zhang

Peking University; MIT Laboratory for Financial Engineering

Date Written: October 18, 2021

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, 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

Suggested Citation

Lo, Andrew W. and Zhang, Ruixun, Quantifying the Impact of Impact Investing (October 18, 2021). Available at SSRN: https://ssrn.com/abstract=3944367 or http://dx.doi.org/10.2139/ssrn.3944367

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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E62-618
Cambridge, MA 02142
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617-253-0920 (Phone)
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HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

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Santa Fe, NM 87501
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Ruixun Zhang

Peking University ( email )

5 Yiheyuan Road
Beijing, Beijing 100871
China

HOME PAGE: http://www.math.pku.edu.cn/teachers/ZhangRuixun%20/index.html

MIT Laboratory for Financial Engineering

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

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