The Impact of Impact Investing

Abstract

quantifying the impact of impact investing∗ andrew w. lo† and ruixun zhang‡ first draft: 18 october 2021 this draft: 18 december 2022 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; environmental, social, and governance investing; socially responsible investing; venture philanthropy; investments. jel classification: c10, c20, g11, g12 ∗we thank mike chen (discussant), nan chen, ron kahn, mark kritzman, bob merton, jonathan parker, lukasz pomorski, krishna ramaswamy, luke taylor (discussant), lintong wu, and haoxiang zhu for …

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