FINANCE


Te risk and return of impact investing funds Journal of Financial Economics, 161, November 2024 LINK TO PAPER LINK TO KELLY POSENAU VIDEO


KELLY E. POSENAU ASSISTANT PROFESSOR


Samuel Curtis Johnson Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Co-authors • Kelly E. Posenau Assistant Professor, Samuel Curtis Johnson Graduate School of


Management, Cornell SC Johnson College of Business, Cornell University


• Jessica Jeffers, HEC Paris • Tianshu Lyu, Yale School of Management


Summary Impact investing has attracted a growing amount of investor capital over the


last decade by promising to target both financial returns and a social or envi- ronmental goal. It has simultaneously attracted substantial debate, especially over its financial merit. Critics argue that constrained strategies like impact investing must have lower risk-adjusted returns than unconstrained strategies under standard assumptions. Others challenge the validity of these assump- tions, especially in private markets. Crucially missing from the debate in private markets is an understanding of impact investing’s risk exposure, which may reconcile concessionary absolute returns with a profitable strategy for some investors, depending on the risks they wish to hedge.


Tis paper fills the gap in the literature by providing the first analysis of the risk properties of impact investing relative to other strategies and the corre- sponding risk-adjusted return. Using new data and methodology, the authors find impact investing has lower exposure to market risk relative to other private market strategies, providing support to the hedging view of ESG. After accounting for the high market risk exposure of most private market funds, returns are closer between impact investing and non-impact investing. Still, if investors care only about total returns, impact funds will represent a financial return concession, which can be larger for investors who hold different wealth portfolios than the market. Tese findings demonstrate that a constrained strategy like impact investing can extract value, and they also illuminate the role that impact can play in modifying the risk profile of investors’ portfolios.


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| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2024 EDITION


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