Quantifying the Impact of Impact Investing
73 Pages Posted: 18 Oct 2021 Last revised: 18 Apr 2023
Date Written: October 18, 2021
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
Suggested Citation: Suggested Citation