Effective Impact Investing

Max Mintz is an im­pact-fo­cused fi­nan­cial ad­vi­sor, and a part­ner at Com­mon In­ter­ests. Be­fore en­ter­ing the fi­nan­cial ser­vices in­dus­try, he founded the Rut­gers Un­der­grad­u­ate Philos­o­phy Jour­nal. Gabe Riss­man founded Stake, (lets you use your voice as a share­holder to ad­vo­cate for cor­po­rate so­cial change) and Real­im­pact­tracker.com (scores the rel­a­tive im­pact of mu­tual funds, method­ol­ogy will be open sourced in 2019).

Dis­claimer: Max and Gabe work in the im­pact in­vest­ment space (see above). Our views may be in­fluenced by con­fir­ma­tion bias. But the ar­gu­ments be­low are what drew us into the field, be­fore we had any rea­son to care about it.

This post is writ­ten in re­sponse to Hauke Hille­brandt’s De­cem­ber 2018 post on the EA fo­rum: Donat­ing Effec­tively is Usu­ally Bet­ter than Im­pact In­vest­ing, which sum­ma­rized his re­cently re­leased pa­per, co-au­thored by John Halstead.

Be­fore we dive in, a quick point of clar­ity: this re­sponse only cov­ers pub­lic equity mar­kets (stocks or mu­tual funds that you might find in your re­tire­ment ac­count). Most peo­ple and or­ga­ni­za­tions in­ter­act with the pub­lic mar­kets by in­vest­ing in a fund. We look at what makes these funds im­pact­ful. We mostly agree with John and Hauke’s anal­y­sis of im­pact in pri­vate equity, debt, and ven­ture cap­i­tal, and try to im­ple­ment his sug­ges­tions in our in­vest­ments in these spaces.

While much of John and Hauke’s pa­per is cor­rect, the piece led at least a few of our EA friends to be­lieve that all im­pact in­vest­ing is in­effec­tive. This out­come is dan­ger­ous, be­cause the pa­per ig­nores share­holder ad­vo­cacy, which is the pri­mary mechanism for im­pact in pub­lic equity in­vest­ing. Share­holder ad­vo­cacy is when an in­vestor uses her own­er­ship stake in a com­pany to in­fluence cor­po­rate poli­cies and prac­tices. We be­lieve that EAs should deeply ex­plore share­holder ad­vo­cacy as a tac­tic to ac­com­plish many of the goals of the com­mu­nity.

We also be­lieve that the pa­per pre­sents a false di­chotomy be­tween donat­ing and im­pact in­vest­ing, which is pred­i­cated on the mis­taken as­sump­tion that im­pact in­vest­ing leads to lower fi­nan­cial re­turns. On the con­trary, there is sub­stan­tial ev­i­dence that thought­ful im­pact in­vest­ing has his­tor­i­cally helped fi­nan­cial perfor­mance. Un­for­tu­nately, the piece misses this pos­i­tive re­sult be­cause it equates the out­perfor­mance of sin stocks (com­pa­nies that sell “sin­ful” prod­ucts, like to­bacco or gam­bling com­pa­nies) with the ex­pected un­der­perfor­mance of all im­pact in­vest­ments in pub­lic mar­kets. This equiv­alence is un­jus­tified be­cause im­pact in­vest­ing in the pub­lic mar­kets is not equiv­a­lent to screen­ing out sin stocks. Some funds cer­tainly take that ap­proach, though this screen­ing strat­egy is ac­tu­ally on the de­cline, while best-in-class and other strate­gies are pop­u­lar and grow­ing.

Fi­nally, John and Hauke ar­gue that be­cause im­pact in­vest­ing doesn’t sig­nifi­cantly im­pact stock price, there is no ad­di­tion­al­ity. We agree that im­pact in­vest­ing does not cre­ate sig­nifi­cant im­pact through di­rect stock price im­pacts. On the other hand, while stock price im­pacts of im­pact in­vest­ing would change cor­po­rate be­hav­ior, other sig­nal­ing effects of im­pact in­vest­ing still do in­fluence cor­po­rate be­hav­ior change. Ad­di­tion­al­ity comes from a sys­tems per­spec­tive—the larger the trend of im­pact in­vest­ing, the larger the sig­nal.

Share­holder Ad­vo­cacy Creates Sub­stan­tial Impact

A re­cent aca­demic liter­a­ture re­view demon­strated the abil­ity for share­hold­ers to drive cor­po­rate change on en­vi­ron­men­tal, so­cial, and gov­er­nance is­sues with a fairly high suc­cess rate:

“Dim­son et al. (2015), an­a­lyz­ing a dataset of over 2152 share­holder en­gage­ment re­quests be­tween 1999 and 2009, re­port that 18% were suc­cess­ful in the sense that the re­quest was im­ple­mented by the com­pany. Hoep­ner et al. (2016) re­port a suc­cess rate of 28% in a dataset of 682 en­gage­ments be­tween 2005 and 2014. Ex­pand­ing on these re­sults, Barko et al. (2017) re­port a suc­cess rate of 60% in a sam­ple of 847 en­gage­ments be­tween 2005 and 2014. Dim­son et al. (2018) re­port a suc­cess rate of 42% in a sam­ple of 1,671 en­gage­ments be­tween 2007 and 2017. To­gether, these stud­ies provide strong ev­i­dence that share­holder en­gage­ment is an effec­tive mechanism through which in­vestors can change com­pany ac­tivi­ties.”

Share­holder ad­vo­cacy is only im­pact­ful if the changes that cor­po­ra­tions im­ple­ment are mean­ingful. There is no com­pre­hen­sive study of the im­pact of cor­po­rate im­ple­men­ta­tion of share­holder en­gage­ments, but some ex­am­ples give a sense of the scope of in­vestor im­pact.

In­vestors have led the charge in get­ting com­pa­nies to stop fund­ing cli­mate-deny­ing or­ga­ni­za­tions, pro­tect LGBT work­ers from dis­crim­i­na­tion, re­move firearms from gro­cery store shelves, and limit fi­nanc­ing of coal power plants. Just this past month, an in­vestor coal­i­tion pushed Royal Dutch Shell to com­mit to com­pre­hen­sive green­house gas re­duc­tions. One so­cially re­spon­si­ble in­vest­ment man­ager, Green Cen­tury Cap­i­tal Man­age­ment, has been par­tic­u­larly suc­cess­ful in mov­ing com­pa­nies for­ward on EA pri­ori­ties of biose­cu­rity and an­i­mal welfare. Over the last two years it has pushed sev­eral ma­jor com­pa­nies to phase out rou­tine use of med­i­cally im­por­tant an­tibiotics in sup­ply chains. Two months af­ter Green Cen­tury called on Tyson Foods to ex­plore plant-based pro­teins, Tyson took an own­er­ship stake in Beyond Meat, and launched a $150 mil­lion ven­ture cap­i­tal fund fo­cused on food in­no­va­tion. Green Cen­tury’s ad­vo­cacy has been so suc­cess­ful that they’ve be­come a re­source for their port­fo­lio com­pa­nies, col­lab­o­rat­ing to craft poli­cies when those com­pa­nies ac­tively want to be bet­ter.

Some cor­po­rate ad­vo­cacy cam­paigns are suited to non­prof­its pub­li­ciz­ing bad deeds; oth­ers are suited to in­ter­nal share­holder pres­sure. Sev­eral of the most suc­cess­ful cam­paigns come when non­prof­its and share­holder ad­vo­cates work to­gether, like the wave of cage-free com­mit­ments over the last two years.

We be­lieve that a mis­sion-ori­ented in­di­vi­d­ual or or­ga­ni­za­tion should con­sider whether their prob­lem is well-suited to the share­holder ad­vo­cacy an­gle, in­stead of cat­e­gor­i­cally dis­miss­ing the po­ten­tial of im­pact in­vest­ing.

Im­pact in­vest­ments in pub­lic mar­kets do not en­tail a re­duc­tion in fi­nan­cial re­turns.

John and Hauke’s piece makes strong the­o­ret­i­cal and em­piri­cal ar­gu­ments that sin stocks out­perform. While we ques­tion the gen­er­al­ity of that con­clu­sion (al­though sin stocks have out­performed his­tor­i­cally, it’s not cer­tain that the trend will con­tinue, as con­sumers be­come more so­cially con­scious and the risks to port­fo­lios from fac­tors such as cli­mate change in­ten­sify), even if it were true, it would still be a mis­take to use it as ev­i­dence that im­pact in­vest­ing in pub­lic mar­kets un­der­performs. Many im­ple­men­ta­tions of im­pact in­vest­ing do not screen out sin stocks, in­stead adopt­ing a strat­egy of in­te­grat­ing en­vi­ron­men­tal, so­cial, and gov­er­nance (ESG) fac­tors into in­vest­ment crite­ria.

The­o­ret­i­cally, com­pa­nies that man­age their so­cial and en­vi­ron­men­tal im­pacts are less prone to reg­u­la­tory and rep­u­ta­tional risk. Em­piri­cally, most stud­ies find that ESG fac­tors cor­re­late pos­i­tively with fi­nan­cial perfor­mance. A 2015 meta-anal­y­sis of over 200 aca­demic stud­ies from Oxford and Arabesque As­set Man­age­ment found sig­nifi­cant em­piri­cal sup­port for the the­o­ries that good ESG prac­tices led to a lower cost of cap­i­tal, bet­ter op­er­a­tional perfor­mance, and pos­i­tive stock perfor­mance. John and Hauke’s piece ac­tu­ally refer­ences an­other meta-study of the in­fluence of im­pact crite­ria on cor­po­rate fi­nan­cial perfor­mance (CFP). The con­clu­sion is that: “ap­prox­i­mately 90% of stud­ies find a non­nega­tive ESG–CFP re­la­tion, of which 47.9% in vote-count stud­ies and 62.6% in meta-analy­ses yield pos­i­tive find­ings”. John and Hauke dis­miss this re­sult on page 22 of his pa­per, ar­gu­ing that it is more likely that the stud­ies show­ing ESG out­perfor­mance are flawed than that sin stocks don’t out­perform. But the two (sin stock out­perfor­mance and ESG out­perfor­mance) are not mu­tu­ally ex­clu­sive.

New stud­ies fur­ther demon­strate that fo­cus­ing on ma­te­rial sus­tain­abil­ity fac­tors helps fi­nan­cial perfor­mance. Rus­sell In­vest­ments re­cently con­firmed Khan et al.’s 2016 study show­ing that com­pa­nies with high perfor­mance on rele­vant ESG fac­tors, as defined by the Sus­tain­abil­ity Ac­count­ing Stan­dards Board, also out­perform fi­nan­cially. Per­haps most im­por­tant, ev­i­dence sug­gests that suc­cess­ful share­holder ad­vo­cacy on ESG is­sues, the best path­way to im­pact, leads to fi­nan­cial out­perfor­mance (Strick­land et al., Becht et al., and Dim­son et al.). This re­sult is likely due to the pos­i­tive re­la­tion be­tween sus­tain­abil­ity perfor­mance and cor­po­rate fi­nan­cial perfor­mance.

Im­pact of in­vestor be­hav­ior on cor­po­rate de­ci­sion making

Im­pact in­vestors likely achieve ad­di­tion­al­ity by build­ing the size of a trend to shift cor­po­rate be­hav­ior.

Large money man­agers in­fluence cor­po­rate be­hav­ior. Since in­vestors choose com­pa­nies’ boards of di­rec­tors and vote on ex­ec­u­tive com­pen­sa­tion pack­ages, com­pa­nies adapt their be­hav­ior to meet in­vestor de­mand, in­clud­ing on so­cial and en­vi­ron­men­tal is­sues. For ex­am­ple, 85% of S&P 500 com­pa­nies now pro­duce sus­tain­abil­ity re­ports as a re­sult of de­mand from as­set man­agers look­ing for sus­tain­abil­ity met­rics, up from just 20% in 2011. Sus­tain­abil­ity re­ports are far from perfect, but the qual­ity and quan­tity of re­port­ing im­proves over time, and what is mea­sured can be man­aged.

As money man­agers feel the need to in­vest im­pact­fully to grow and re­tain as­sets, they have the in­cen­tive to de­mand bet­ter so­cial and en­vi­ron­men­tal perfor­mance of their com­pa­nies. The trend has already be­gun. In March 2016, Morn­ingstar, a ma­jor rater of mu­tual funds, pub­lished its sus­tain­able “globes” rat­ings. Hartz­mark & Suss­man (2018) an­a­lyzed flows of cap­i­tal into and out of mu­tual funds. The au­thors found that be­ing cat­e­go­rized by Morn­ingstar as low sus­tain­abil­ity re­sulted in net out­flows of over $12 billion, while be­ing cat­e­go­rized as high sus­tain­abil­ity led to net in­flows of over $24 billion. Ad­ding to a trend that hits large money man­agers at the bot­tom line con­tributes to sys­tem-wide changes in cor­po­rate in­cen­tives, and thus, be­hav­ior.

The in­creased fo­cus on ESG in­vest­ing is now also con­tribut­ing di­rectly to cor­po­rate cost of cap­i­tal. Fitch re­cently up­dated credit rat­ings to in­clude ESG, now di­rectly (albeit slightly, for now) im­pact­ing the cost of rais­ing debt, likely shift­ing cor­po­rate be­hav­ior. It is likely that more in­vestor at­ten­tion on ESG will fur­ther this trend.

Divest­ment has also caused large flows of cap­i­tal based on im­pact prin­ci­ples, and the shift in as­sets to­ward high-perform­ing ESG com­pa­nies sends a broader and even more ac­tion­able sig­nal to com­pa­nies. It’s much harder for a to­bacco com­pany to stop sel­l­ing to­bacco prod­ucts than for a car com­pany to im­prove fuel econ­omy. Also, the ev­i­dence that ESG helps fi­nan­cial perfor­mance only fur­ther en­courages com­pa­nies to im­prove their ESG perfor­mance.


We hope to have pro­vided am­ple ev­i­dence that im­pact in­vest­ing and share­holder ad­vo­cacy in the pub­lic mar­kets cre­ates im­pact. We also hope to have pro­vided suffi­cient ev­i­dence that im­pact in­vest­ing in pub­lic mar­kets has not in gen­eral hurt fi­nan­cial perfor­mance. Taken to­gether, there is a strong case to in­vest in funds that adopt both strate­gies, not as a sub­sti­tute to non­profit dona­tions, but as a com­ple­ment. In­di­vi­d­u­als who have already set aside a por­tion of funds for in­vest­ment should con­sider di­rect­ing those funds to im­pact in­vest­ing.

In ad­di­tion to choos­ing im­pact­ful in­vest­ment man­agers, you can use your voice as a share­owner di­rectly. Or­ga­ni­za­tions might con­sider fol­low­ing the lead of the McKnight Foun­da­tion to in­fluence your com­pa­nies and out­sourced fund man­agers. Max and Gabe both work to help in­di­vi­d­u­als ex­er­cise their voices to cre­ate im­pact. You might work with im­pact fo­cused ad­vi­sors, vote in fa­vor of so­cial and en­vi­ron­men­tal prox­ies, ad­vo­cate for more sus­tain­able op­tions within your re­tire­ment plan, or sup­port share­holder pe­ti­tions on Stake.

We end with a plea to the EA com­mu­nity. It would be great to eval­u­ate the high­est pri­ori­ties in cor­po­rate ad­vo­cacy for share­hold­ers to pur­sue. Could in­vestors, for ex­am­ple, en­courage tech com­pa­nies to do more on AI safety? We both got into this field be­cause of the EA move­ment, and would wel­come feed­back from the com­mu­nity to be bet­ter at what we do.