Responsible Investing: ESG needn't mean lower returns

It has been a commonly-held view among some investors that backing impact-focused funds requires a sacrifice on the side of financial returns. However, an impact investing benchmark developed last year by Cambridge Associates and the Global Impact Investing Network may well lay these rumours to rest once and for all.

The benchmark compares 51 impact funds with $6.4 billion in combined assets under management (AUM) against a comparative universe of 705 funds, with a combined AUM of $293 billion, all raised between 1998 and 2010.

The research found that across all vintage years the pooled internal rate of return (IRR) for the impact funds is 6.9 percent, compared with 8.1 percent for the funds in the comparative universe.

However, vintage year had a significant effect. Impact funds raised between 1998 and 2001 delivered a pooled IRR of 15.6 percent, compared with 5.5 percent for the comparative universe. The performances were in line for 2002-04 vintage funds. However, 2005-10 vintage impact funds have lagged.

Emerging markets impact investing funds – the most represented geographic group in the study – raised between 1998 and 2004, whose investments have largely been realised, had a pooled net IRR of 15.5 percent. Those in the comparative universe have a net IRR of just 7.6 percent.

As with the overall picture, the more recent story is not so rosy; 2005-07 vintage emerging markets impact funds delivered a net IRR of just 2.8 percent, compared with 11 percent for the comparative universe. In the period between 2008 and 2010 the gap narrows to 9.8 percent versus 13.0 percent. However, as the benchmark notes, 2005-10 vintage funds are still largely unrealised (DPI is 0.3x while TVPI is 1.2x) and therefore it’s too early to draw conclusions.

Impact investing funds under $100 million delivered an IRR of 9.5 percent, compared with 4.5 percent for the comparative universe. Meanwhile, those over $100 million delivered a 6.2 percent IRR in aggregate between 1998 and 2010, versus 8.3 percent for the comparative universe.

It’s still early days for impact investment funds, but this initial analysis bodes well for investors seeking to satisfy both financial and social goals.