How Impact Seeks To Enhance The Risk-Return Equation

Investing with the intent to do well while doing good is gaining traction. BlackRock’s Eric Rice met with the “Father of Impact Investing” to discuss the evolution from risk-return to risk-return-impact.

Impact investing, a rapidly growing segment of sustainable investing, aims to channel money toward companies that have a positive impact on the world in which they operate ― and to deliver outperformance for investors in the process.

Eric Rice, Head of Impact Investing within BlackRock Fundamental Equities and Portfolio Manager of BlackRock’s actively managed impact funds, hosted a virtual sit-down with Sir Ronald Cohen, the highly regarded “Father of Impact Investing” and author of the new book Impact: Reshaping Capitalism to Drive Real Change. The conversation, available here, covers the forces driving impact and how this style of investing is upending the traditional risk-return equation.

The new math

A major shift is underway as companies are increasingly measured not only on how much money they make, but also on the impact they are having. Rather than judging by risk and return alone, investors are looking at risk, return and impact.

Two examples: measuring companies on the impact they are having toward the achievement of the 17 United Nations Sustainable Development Goals, and measuring the impact they have on the progress toward the Paris Climate Agreement to limit global warming to well below 2 degrees Celsius. Mr. Rice says an extra $5 trillion of investment is needed to achieve these two goals ― and that public market participation will be critical in achieving it.

The myth of lower returns

One nagging narrative, according to Mr. Rice, is the idea that impact investing is a philanthropic endeavor that neglects the fiduciary obligation to maximize returns.

“This myth is now being exploded,” says Sir Ronald, noting that some electric vehicle companies are attracting lofty valuations, while some big oil companies have lost significant value over the past few years. “There are a lot of reasons why risk-return-impact [could] deliver better returns than just risk-return optimization.” For example, a company with a great product that does environmental harm, or uses child labor, could face consumer boycotts and sterner regulations, weighing on profitability.