The Impact of Sustainable Investment Funds - Impact Channels, Status Quo of Literature, and Practical Applications

Abstract

Investment funds – and thereby fund investors – have an impact on, e.g., the environment in two ways. First, by simply holding financial assets, such as stocks and bonds, they are sharing the environmental impact of the respective company (1st Order Investor Impact). Second, they can achieve changes in the environmental impact of the companies they hold through three impact channels: engagement, portfolio allocation, and further measures (2nd Order Investor Impact).

In the first part of this white paper, we describe the 1st and 2nd Order Investor Impact and structure the 2nd Order Impact channels using a systematic impact framework.

In the second part of this white paper, we present the status quo of the academic literature on the 2nd Order Investor Impact of sustainable investment funds. This overview shows that the three impact channels have already been described quite well in theoretical terms. However, there have been very few empirical studies of the impact of sustainable investment funds to date. Thus, the question of whether any real impact by investment funds has already been achieved or can be expected in the future remains unanswered. The outcome of academic studies points in either direction.

To help making a future 2nd Order Investor Impact more likely, the third part of this white paper provides an example of how to apply the impact framework. We show how sustainable funds can communicate their expected impact in a transparent and systematic way, for example using impact grids. Moreover, such information can be used by external parties, like sustainability rating agencies, to quantify the impact sustainable investment funds have on real-world developments.

Keywords: Impact Investing, Impact Framework, Impact Channels, Impact Literature

JEL Classification: G23, Q54