Impact Investing: Can impact be achieved in public markets?

Abstract

Risk-adjusted returns are no longer the sole metric investors consider. A growing number of investors are now wanting to know that their capital is having a positive impact for society and the planet, as well as risk-adjusted returns. The existing options tend to focus on being ‘less bad’ and have mixed efficacy in delivering comparable risk-adjusted returns. In addition, they are unlikely to create any additional positive impact than otherwise would have been achieved without the investor’s capital, so why invest in them at all? This research examines an emerging investment strategy that has the potential to deliver additional positive impact as well as excess financial returns by repurposing a mechanism stigmatized by corporate raiders and private equity firms historically, that mechanism being shareholder activism. Our dataset of companies, who have been targets of such a strategy, exhibit materially positive excess stock returns over the shorter-term event window. Results suggest that this strategy is more effective when the target companies are smaller or when the investor acquires a larger shareholding. Importantly, the target companies across all subsamples experience a material uplift in environmental, social, and governance scores in the year after the activism event, suggesting success in creating additionality of impact.