Do people investing money in companies geared for social or environmental good have to give up the prospect of market-rate returns in exchange for working towards a better world?
No. At least according to the first systematic academic research to address the young but extremely broad field of "impact investing," the Wharton Social Impact Initiative
's (WSII) new report
, "Great Expectations: Mission Preservation and Financial Performance in Impact Investments." In some arenas, socially or environmentally conscious investors can see their returns hit market-rate performance.
"It’s difficult to talk about the report because there is so much nuance in it," explains co-author Harry Douglas, a full-time impact investing associate at WSII, who continues to follow the data of this growing field. However, he hopes that the findings will be accessible enough to spread the message that, contrary to longtime perceptions, impact investing doesn’t "necessitate a concessionary return."
What does that mean?
Investors who choose to put their private equity dollars into companies with missions like micro-finance, healthcare in low-income regions, education technology or green energy don’t have to accept smaller returns than folks who put their money into more traditional profit-driven avenues.
The study tracked the performance of 53 impact investing private equity funds that represent 557 individual investments, and debunks the widespread assumption that lower investment returns are inevitable when investing in socially focused funds.
How do we define impact investing? According to the Global Impact Investing Network
, the receiving company’s intentionality of impact (meaning their bedrock commitment to the good outcomes they espouse), the measurable impact the company makes, and the expectation of a financial return.
So since impact investing is such a broad field, with many investors valuing a specific social interest over maximized profits, how did WSII identify a stable of funds to follow? WSII asked participating fund managers to self-identify in one of three categories: those seeking to simply preserve the capital invested, those seeking below-market-rate returns, and those pursuing market-rate returns.
"Our report doesn’t make any type of value judgements about what’s appropriate there, because there’s important work to be done in each of those three segments of the financial expectation," says Douglas. But this study focused only on the latter group of investors: those whose fund managers were seeking market-rate returns.
They did this because they wanted to get the best understanding possible of what the industry’s going to look like over the next couple of years, given the typical five-to-seven-year life cycle of a private equity investment. Funds launched around 2010 are nearing the time that fund managers will exit the companies involved. So there are the questions of whether those investments will prove profitable, whether the companies' missions continue after the exit, or if fund managers seeking higher returns abandon the ideals when mission protections aren’t built into the language of exit agreements.
"We focus on this market-rate seeking segment because we felt the tension would be greatest in this group," explains Douglas. "They would be trying to balance these competitive market-rate returns with preserving portfolio company mission."
This research is just the beginning.
"We’re really hoping to grow this sample size, so we can make more definitive statements about the industry," adds Douglas.
Writer: Alaina Mabaso
Source: Harry Douglas, Wharton Social Impact Initiative