Impact Investing vs. the Broader Market?

Amberjae Freeman
May 1, 2017
8 min read
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“Do I have to sacrifice returns to participate in Impact Investing?” The answer is, emphatically, no.

On average and in the aggregate, impact investing portfolios perform as well as, or better than the market.

Like not wearing white after Labor Day, the idea that impact investing requires a sacrifice on returns is an outdated notion. In fact, the oldest US stock index using environmental and social considerations has clearly shown that ESG can actually create added value. In fact, since its birth in 1990, the Domini Social Index (DSI)—now known as the MSCI KLD Social 400 Index—has outperformed both the S&P 500 and the Russell 3000 on an actual and risk-adjusted basis for 25 years. What’s more, the MSCI KLD Social 400 Index  is distinguished by the fact that it doesn’t use traditional quantitative metrics (like cash flows, revenue, etc.) as criteria for inclusion. Inclusion is based exclusively on ESG factors. Boom!

MSCI KLD Social 400 Index—has outperformed both the S&P 500 and the Russell 3000 on an actual and risk-adjusted basis for 25 years

Think you need to sacrifice returns to invest in impact portfolios? Absolutely not.  And while we’re at it, here are two more myths to let go of.

Myth No.1 Impact Investing Creates Diversification Constraints

The myth: It’s best to invest in a large basket of companies to spread out your risk. Impact and ESG investing limits the universe of investment options, which means you’re unable to spread risk around.

The reality: The size of an impact investors’ available universe depends on their investment strategy. For example, a “best-of-sector” approach would still give you exposure to all available industries and sectors, but would select only the companies with the best ESG ratings. This would actually enhance the quality of the investment product.  An analysis of 200 studies on sustainable investing and financial performance conducted by Arabesque Partners1 found that:

80% of the studies show that stock price performance is positively influenced by good sustainability practices.88% of the research shows that solid ESG practices result in better operational performance.90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital.

Myth No.2 The Cost Outweighs the Benefit

The myth: Sustainable investing funds have to pay for extra research, so they have higher than normal expense ratios. These additional costs eat into investor returns.

The reality: These days, with advancements in technology, the interconnectedness of the global economy, and better insight into company ESG data, the cost of ESG investing has come down. Which means retail investors can participate, just like the big players.

Impact Investing vs. the Broader Market

Truth No.1: Impact Investments Are Smart Investments

ESG/Impact investments perform as well as, or better than, their conventional counterparts. Studies about this abound. For example, a TIAA analysis2 of leading responsible investing equity indexes over the long term found no statistical difference in returns compared to broad market benchmarks, which suggests the absence of any systematic performance penalty. Also, the cost for Impact/ESG products tends to be comparable to their non-ESG counterparts.

In 2015, Deutsche Asset & Wealth Management conducted an analysis of more than 2,000—two thousand!—empirical studies3 and found a positive relationship between ESG performance and corporate financial performance (CFP). Specifically, they found:

The business case for ESG investing is empirically very well founded.Investing in ESG pays financially.The positive ESG impact on corporate financial performance appears stable over time.

Truth No.2: Companies With Positive ESG Performance Live Longer

A 2010 equity and credit-risk analysis published in the Journal of Investing tested whether companies with higher ESG performance would have greater life expectancy. Spoiler alert: They do. They also have more favorable credit rates.4

As Dave noted in Impact Investing: Not Just a Niche Anymore, the global sustainable investmenting landscape saw a 25% increase between 2014 to 2016, and now accounts for 26% of total assets invested globally. Gains are also being made in retail investing, which saw a 12.6% increase between the same period. Plus, there’s been a flurry of new responsible investment products available to retail investors. So barriers to entry are coming down as the impact investing landscape heats up!



1 Gordon L Clark, Andreas Feiner & Michael VIehs“From the Stockholder to the Stakeholder: How sustainably can Drive Financial Outperformance,” Arabesque Partners, March 2015.

2 Amy O’Brien, Lei Liao & Jim Campagna“Responsible Investing Indexes delivered market-like returns and risk, while pursuing social goals,,” TIAA Global Asset Management, April 2016

3 Gunnar Friede, Timo Busch & Alexander BassenESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, (2015)

4 Dan diBartolomeo“Equity Risk, Default Risk, Default Correlation, and Corporate Sustainability, Northfield News, Journal of Investing, March 2011

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