Quantifying the Impact of Impact Investing

We propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing; environmental, social, and governance (ESG) objectives; and other nonfinancial investment criteria. We derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor–Black portfolios to maximize the risk-adjusted returns of impact portfolios, we derive an explicit and easily computable measure of the financial reward or cost of impact investing as compared with passive index benchmarks. We illustrate our approach with applications to biotech venture philanthropy, a semiconductor research and development consortium, divesting from “sin” stocks, ESG investments, and “meme” stock rallies such as GameStop in 2021. This paper was accepted by Agostino Capponi, finance. Funding: Research funding from the National Key Research and Development Program of China [Grant 2022YFA1007900], the National Natural Science Foundation of China [Grant 12271013], Peking University’s Fundamental Research Funds for the Central Universities, and the Massachusetts Institute of Technology Laboratory for Financial Engineering is acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01168 .