Doing well by doing good investigating the potential of impact investing in public equities

Abstract

Impact investing is one of the latest innovations in the realm of responsible investment strategies. The industry has seen exponential growth since the term was coined in 2007 but is now held back by unclear boundaries to related strategies and varying definitions. This makes it hard to create a global and unified understanding of what the industry includes, which makes it difficult for investors to adopt the approach. This thesis seeks to clarify the scope of impact investing by exploring existing literature to find a definition of the term. We find two core concepts of impact investing, a financial and a non-financial objective. Formally it refers to investments made with the intention of generating a financial return while creating a positive societal and environmental impact, and the impact has to be measured or at least be measurable. This places it at the intersection between conventional investing for financial returns and philanthropic investments for non-financial impact. We further seek to expand existing literature by investigating the profitability of the investment strategy applied in public equities, where knowledge is scarce. We are held back by a lack of data on public equity impact investments but bypass this problem by creating an index tracking the historical performance of potential impact investments. By analysing the returns of the index, we find indications of outperformance over the measured time-period, both in excess of its systematic risk exposure and relative to a conventional index. However, the limitations of our approach mean that we cannot conclude that impact investing outperforms on average. On the other hand, we find no signs of underperformance after addressing the limitations, indicating that non-concessionary returns are possible. As the industry matures more data will become available enabling more precise analyses and information on the profitability of the strategy. For now, our analysis can serve as first step to uncovering the performance of public equity impact investments.