Impact Investing Promises Returns With Purpose, But Investors Still Need Proof

A worthy mission can make an investment compelling, but it cannot rescue weak financial fundamentals or substitute aspiration for measurable results.

That tension lies at the center of impact investing, a broad category encompassing investments intended to generate financial returns alongside social or environmental benefits. Strategies can range from public funds and bonds to private companies, nonprofit loans and projects combining charitable and investment capital.

“I’ve always believed your investments should reflect your financial goals, but there’s nothing wrong with wanting them to reflect your values, too,” Jay Duffy, co-founder and managing partner of Frame Wealth Partners, tells First for Money. “The problem is that a good cause and a good investment aren’t automatically the same thing.”

Duffy says impact investing does not necessarily require choosing between returns and results, but every opportunity still must earn its place in a portfolio.

“That means evaluating risk, returns, fees, taxes, and liquidity before getting excited about the mission statement,” he says.

Duffy compared selecting an investment solely for its social purpose to buying an environmentally friendly car without checking whether its brakes work.

“A worthy mission doesn’t excuse poor financial fundamentals,” he says.

Return expectations vary considerably across impact investments. Some pursue market-rate performance, while others accept lower or “concessional” returns to finance projects that may struggle to attract conventional capital.

Mark Muckerheide, CEO of Ground Up Investing (GUI), the impact-investing arm of global development organization Corus International, tells First for Money his organization provides a concessional or “risk-adjusted” return.

“For example, we provide senior debt lenders a 6% return on a 5-year loan, which is above philanthropy (-100%) and above just a return of [principal] (0% return), but below a fully commercial rate that for example local banks in emerging markets often charge,” he says.

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Duffy cites Global Impact Investing Network research finding that 86% of surveyed impact investors reported financial performance that met or exceeded their expectations. He cautions, however, that satisfying expectations does not establish that an investment outperformed conventional alternatives.

“Some impact strategies can generate competitive returns, while others introduce additional costs, concentration, or liquidity risks,” he says. “The stock market doesn’t give you extra credit for having good intentions.”

Determining whether an investment delivered its promised social or environmental benefit presents another challenge.

“We use a combination of self-reporting from companies, financial statements and third party impact audits to collect and verify impact data on KPIs like income provided to farmers, jobs created and acres improved,” Muckerheide says.

Duffy recommends looking for defined objectives, consistent reporting and credible independent verification.

“If a fund claims to support affordable housing, how many affordable homes were created or preserved?” he asks. “If it claims to reduce carbon emissions, how much was actually reduced? And perhaps most importantly, who verified those numbers?”

That scrutiny can also expose “impact washing,” in which marketing claims outrun demonstrable results.

Duffy describes it as “when the marketing department is doing more work than the actual investment itself.”

“Until we have [an] accepted and audited global standard for impact accounting,” Muckerheide says, “[the] investor has to lean on other methods, such as asking for third party validations, seeking input from other investors and doing site checks themselves where relevant.”

Impact investing is not always the most effective vehicle for supporting a cause. Depending on an investor’s objectives, Duffy says charitable giving or a donor-advised fund may be more appropriate.

“There’s nothing wrong with wanting your money to do some good in the world,” he says. “Just make sure it’s still doing its job in your financial plan. Because saving the world sounds a lot better when you haven’t jeopardized your retirement in the process.”

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