It’s an old debate: does socially responsible investing under its variations (including “impact investing”) come at a cost in terms of risk-adjusted performance? Or does it actually add a dividend, so that one does well by doing good? Or are impact and non-impact investing in otherwise comparable assets on a par in performance?
One common argument of the SRI “bears,” for example, has been that any SRI filters by definition reduce the population of entities in which it is possible to invest, and this implies, as an Italian scholar, Fabio Pizzutilo, put this point last year, that “a non-negligible drawback of SRI is that it is not possible completely to diversify the unsystematic risk of the shares in the portfolio.”
A common argument of the SRI “bulls,” on the other side, has been that the unsustainability of a company’s environmental, social, and governance practices themselves have “real and quantifiable impacts,” of a quite negative sort, and that investing without such screens – or an effort to make a more positive impact – is investing in a way that keeps one blind to considerable risks.
A new paper takes a look at an important piece of the whole of this controversy. It looks specifically at the “real assets arena” and at the private funds portion of that. Within that defined space, some funds have positive social and environmental (and non-financial) goals, others do not. It seems rather straightforward, and apples-to-apples, to compare their bottom lines.
Cambridge Associates and GIIN
Cambridge Associates, in collaboration with the Global Impact Investing Network, has looked at this issue and has found that for three real assets (timber, real estate, and infrastructure) the returns from private impact funds were in general “on a par” with the returns from comparable funds with no environmental or social commitments.
When looked at more closely, the results are a good deal more complicated than that bald statement may suggest. Breaking the question down into the three real assets at issue:
- Timber-focused private impact funds performed better than timber focused funds without an impact goal.
- In real estate, on the other hand, the median return for impact investing funds was lower than that of their non-impact counterparts. But if one looks at the top quartile of each, the best impact funds in this area beat the best non-impact funds.
- In infrastructure, again, the median returns were lower than those of non-impact private infrastructure funds, a median net internal rate of return of 2.5% for the former, 6.5% for the latter. Here, looking to the top quartile makes that horse race a closer call but doesn’t change it. BUT … since the infrastructure focused impact funds often focus on renewable energy, the report also compared them to a set of PE energy funds. That horse race they won. The above mentioned 2.5% compares favorably to the 1.7% performance by non-impact PE energy funds.
In a statement, Jessica Matthews, head of mission related investing practice at Cambridge Associates, said, “There is a misperception that impact investments always come at a price: lower returns. But this research shows that institutions can align this important part of their portfolios – real assets – with their social and environmental missions, without necessarily sacrificing financial returns.”
Another point that stands out from the data: across all three sectors discussed, smaller funds (those that raised less than $100 million) have had the strongest performance.
What the Desired Impacts Are
The report is thankfully quite explicit about what are the desired impacts of the impact funds under consideration.
In the case of timber, for example, impact funds most commonly seek some combination of five outcomes: biodiversity conservation; land conservation and rehabilitation; sustainable timber production; reduction in carbon emissions; and water resources management.
The report also offers a brief discussion of what metrics might be employed to track progress in each of these respects. For example, with regard to timber and biodiversity, “several funds track the number and type of rare species present at year-end on a given piece of land.” With regard to water management, they can “track metrics such as the number of acres of preserved/restored wetlands or number of feet of streams present.”
In real estate, desired environmental impacts include: green real estate; affordable housing; energy efficiency; the generation of jobs; and community services for residents.
Finally, with regard to infrastructure, they include: renewable energy usage; energy efficiency; climate change mitigation; water resources management; the generation of jobs.