Can 'Sustainable' Investing Pay Off? A Report from Wharton Says Yes

Editor’s Note: This article previously appeared in a different format as part of The Atlantic’s Notes section, retired in 2021.

If you’re joining us late: my article in the current issue, about the Generation Investment Management firm of London, explained its potential as a test case for the “sustainability can be profitable!” hypothesis.

Over the past ten economically tumultuous years, the returns of this environmentally and social minded firm have beaten nearly all other investors. Thus Al Gore, Generation’s chairman, and his colleagues say that financial managers should give sustainability another look.

The counter-argument is: this can’t be right. If sustainability really were so lucrative, more people would be doing it already.

In counter to that, Gore et al say: in fact, more firms are taking this approach, and it is paying off. One recent indication, which I mentioned in my article, is the report from Oxford University and Arabesque partners about the growing popularity and profitability of a longer-term, socially minded investment strategy.

Here’s another: a new study from the Wharton School at Penn, with its Social Impact Initiative.

The Wharton study looked at 53 “impact investing” funds from the private equity world, and how both their financial returns and their social-responsibility “impact” measured up. This is an allied but different approach from Generation’s. (Generation’s main fund holds publicly traded corporate stocks, not private equity, and has its own definition of “sustainability.” But “impact investing” and “sustainable capitalism” are part of the same movement.)

Here’s what the study found:

A common critique of impact investing broadly is that investors must expect concessionary financial returns in exchange for pursuing a social or environmental impact… [JF note: ie, most people assume that social responsibility comes at a cost.]

WSII assessed the financial performance of the subset of funds seeking market-rate returns, assuming that the tension between financial performance and mission preservation would be most acute in this group… The data show that impact funds did not have to make concessions in order to preserve the portfolio companies’ missions upon exit. [Ie, as with Gore’s fund these funds have been able both to “do good” and to do well.]

The study goes on to explain its methodology and results and then concludes:

Market-rate-seeking impact investments in the sample, therefore, may be financially competitive on a gross basis with other equity investing investment opportunities. This financial performance may be why impact fund managers often assert that there is little inherent tension between profits and “purpose.”

Worth checking out.