Exclusive: Impact portfolios in listed equities can deliver alpha, and investors don’t have to choose between making money and making a difference, argues a new report by Schroders and the Saïd Business School.
Impact investing in listed equities is delivering competitive financial returns “under the right conditions”, according to new research from Schroders and the Saïd Business School at Oxford University.
The research analysed 257 impact companies and assessed whether the firms outperformed traditional benchmarks, using asset pricing models and regression analysis. It compared impact portfolios to traditional indices, controlling for investment factors such as size and momentum.
The research looked at impact materiality as a potential return driver, and incorporated real-world case studies. It found that impact portfolios delivered “strong absolute and risk-adjusted returns, exhibiting statistically significant alpha unexplained by traditional risk factors”.
It also revealed that the impact portfolios it examined had lower volatility than conventional indices, as well as “reduced drawdowns and milder negative skewness”, suggesting that the portfolios offered stronger downside protections.
Driver of returns
Unsurprisingly, companies with higher revenue alignment to measurable impact themes generated stronger returns. Firms in information technology, healthcare, materials and industrials contributed the highest returns.
The report argued that as regulatory landscapes evolve, and consumer preferences shift, impact should increasingly be seen as a legitimate driver of returns.
“This research offers a timely and important challenge to the persistent belief that impact investing must come at the cost of financial performance. By integrating impact metrics with traditional financial analysis, the findings show that well-constructed impact portfolios can deliver competitive returns with lower volatility and downside risk,” said Amir Amel-Zadeh, director of the Oxford Rethinking Performance Initiative at Saïd Business School.
Financial performance
However, the report’s authors did point out that not all impact investments deliver alpha, and financial analysis and due diligence plays a vital role.
“While not every impact strategy will outperform, the findings in this study challenge the assumption that purpose-driven investing requires financial sacrifice – and suggests that, when executed with discipline, impact can contribute to long-term value creation and portfolio resilience,” said Amel-Zadeh.
The research identifies key factors that contribute to financial performance in impact portfolios.
Impact firms exhibited better operational efficiency and workplace expansion, for example. Impact firms also tend to hold a lower percentage of cash to total assets, suggesting a more active capital deployment strategy, according to the report.
They also possess great asset tangibility, with a larger share of their assets consisting of physical tangible items like property, equipment and inventory, which could mean that they are in industries that require more physical capital, like renewable energy, infrastructure or manufacturing. In addition, they also have higher valuation multiples relative to earnings or cash flow, which the report points out is a common characteristic for growth-orientated firms.
Maria Teresa Zappia, global head of impact at Schroders, pointed out that active investment via a “robust” impact measurement and monitoring framework is vital. “For investors that get this right, aligning financial strength and impact could not just deliver positive purpose outcomes but an investment return edge as well,” she said.
