NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, December 21, 2018

By Kelsey Piper

“Impact investing” is built on a simple idea: If you’re going to invest your money, you’ll want to invest it in companies that are doing work that you believe in. Easier access to capital lets companies do more — expand into new areas, build new products, take promising bets. Your investment would allow a company you believe in to do all those things.

Proponents claim that impact investing is good for the individual investor, too, with many funds advertising that they seek results for the world without sacrificing performance for the investor. In other words, they claim that impact investing won’t just do good — it will make you money. It’s not surprising that younger people seem to overwhelmingly want to invest their portfolios in socially responsible companies.

So this is a good way to do good, right? Well, not really.

In particular, when you do the math, impact investing seems worse for the world and worse for your pocketbook than just investing traditionally, earning higher returns, and donating the difference. Impact investments are often marketed as a cost-free way of doing good. But they’re not cost-free, and under typical circumstances it doesn’t look like they’re doing much good.