Quantifying the Impact of Impact Investing

Management Science

79 Pages Posted: 18 Oct 2021 Last revised: 6 Aug 2023

See all articles by Andrew W. Lo

Andrew W. Lo

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

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, 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

Lo, Andrew W. and Zhang, Ruixun, Quantifying the Impact of Impact Investing (October 18, 2021). Management Science, 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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Ruixun Zhang

Peking University ( email )

5 Yiheyuan Road
Haidian District
Beijing, Beijing 100871
China

MIT Laboratory for Financial Engineering ( email )

100 Main Street
E62-611
Cambridge, MA 02142

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