The Risk and Return of Impact Investing Funds

Jessica Jeffers, Tianshu Lyu, Kelly Posenau

As major societal problems like climate change and inequality grow, investors and the public have become increasingly interested in whether financial markets can be harnessed to help address these issues. Industry participation in sustainable finance and responsible investing has exploded in recent years, with global sustainable investing assets amounting to $30.7 trillion in 2018, a 34 percent increase in two years (GSIA, 2018). While social and environmental responsibility are often debated in the context of public markets, private markets are uniquely suited to address these challenges because of their dominance in early-stage and growth transactions. At these early stages in companies’ lifespans, capital providers exert more influence on both deal sourcing and governance than what they would be able to achieve in public markets (Phalippou, 2017; Gompers et al., 2020).

Impact investing is the practice of using private market strategies to target both financial returns and a social or environmental goal. Although impact investing is a rapidly growing asset class, with $715 billion in assets under management globally, relatively little is known about the financial properties of this approach (Hand et al., 2020; Burton et al., 2021). In particular, to the best of our knowledge no work has addressed the riskiness of impact investing or its financial performance adjusted for market risk exposure.1 This paper fills a gap in the literature by characterizing the risk-adjusted return of impact investing and its risk properties relative to other strategies.

Impact fund data comes from the IFD and Preqin. VC and matched fund data come from Burgiss. All samples cover vintages from 1997 through 2015 with transaction dates from 1999 to 2017. For complete details, please access the full research paper.