-Paper suggests social/environmental impact VC/PE private market returns are lower than mainstream

-Results are different to public equity market ESG strategies.

There’s an ongoing debate in “impact investment” between those who argue impact or deep impact where you are gaining measured social and environmental return will typically not give market rate risk-adjusted financial returns (this tends to be in private equity or venture capital type investments).

Others argue that market rate risk adjusted financial returns are possible alongside measured social / environmental returns. (Let’s avoid the debate about ex-ante risk measurement for now).

Investors do differentiate between concessionary capital where below market rate returns or (partial) default is expected and commercial rate capital but argue over whether deep impact always has to be concessionary.

This differs from “Integrated ESG (Environment Social Governance)” techniques in public equity markets where in general the mass of studies (although not all) seem to show that integrated ESG - where material - leads to (or can lead to) better returns or at least not worse than the market average. (Note this differs from exclusionary strategies, which are now known as SRI - socially responsible investing - or ethical exclusions).

Measurement in private markets is harder, but this recent NBER paper suggests that private equity and VC which have explicit social  or impact objectives do return less than mainstream PE/VC funds. This would be evidence for those who argue that impact will return less in private markets. Debate goes on.

Barber, Brad M. and Morse, Adair and Yasuda, Ayako, Impact Investing (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=2705556 or http://dx.doi.org/10.2139/ssrn.2705556

“We document that investors derive nonpecuniary utility from investing in dual-objective VC funds, thus sacrificing returns. Impact funds earn 4.7 percentage points (ppts) lower IRRs ex post than traditional VC funds. In random utility/willingness-to-pay (WTP) models investors accept 2.5-3.7 ppts lower IRRs ex ante for impact funds. The positive WTP result is robust to fund access rationing and investor heterogeneity in fund expected returns. Development organizations, foundations, financial institutions, public pensions, Europeans, and UNPRI signatories have high WTP. Investors with mission objectives and/or facing political pressure exhibit high WTP; those subject to legal restrictions (e.g., ERISA) exhibit low WTP.”

Blog on some ESG studies here.