Impact Investing: Performance Analysis and Comparison Across Themes

Abstract

Social impact themes prioritized by the United Nations’ “The 2030 Agenda for Sustainable Development” such as clean energy, workplace equality, and industrial innovation share similar characteristics in terms of correlation with the market and volatility over time. However, they have striking differences in their performance characteristics as measured by annualized return, annualized risk, and the MSCI ESG (Environmental, Social, and Governance) Quality Score for Funds. Thus, creating equally weighted portfolios with monthly rebalancing, for Exchange Traded Funds (ETFs) in different themes leads to very different results. In this paper, we develop investment strategies based on the Flexible Asset Allocation model by Keller and Putten (2012). We also expand our definition of themes and observe differences in portfolios of socially responsible ETFs, chosen based on factors including momentum, volatility, correlation and the MSCI ESG Quality Score for Funds. All chosen strategies yield a higher sharpe ratio than just investing in the market index indicating that thematic impact investing typically leads to a higher return than the market for the level of risk taken. In simple terms, it is possible to make good money by doing good.