Once a cynic, MIT Sloan finance professor Andrew W. Lo now heralds the value of Environmental, Social, and Governance (ESG) investing, as he unveiled at the MIT Sloan ESG and Impact Finance conference. Despite a host of skeptics and political backlash against ESG, Lo emphasized that this half-trillion-dollar market successfully merges social good and profitable returns.
Lo started from a place of deep skepticism, believing that impact investing was a ploy by financial institutions to push products onto unsuspecting investors. However, as data revealed that impact investments outperformed traditional ones during the pandemic, his views radically shifted.
Contrary to the traditional belief that fiduciaries must sacrifice returns to deliver on impact, Lo and co-author Ruixun Zhang from Peking University have developed a framework to balance the legal responsibilities of fiduciaries with clients’ desires for social impact. Their paper, “Quantifying the Impact of Impact Investing,” provides a framework to assess the financial impact of any form of impact investing against various index benchmarks.
Using this information, portfolio managers can construct portfolios that achieve social impact while retaining attractive risk-adjusted returns. To highlight this, Lo used the example of the Cystic Fibrosis Foundation, a nonprofit organization that made a significant profit by investing in Vertex Pharmaceuticals for developing cystic fibrosis treatments.
Lo, Zhang, and other co-authors from MIT Sloan also quantified the financial performance of ESG portfolios in the U.S., Europe, and Japan using data from six major ESG rating agencies. The results showed statistically significant excess returns in ESG portfolios from 2014 to 2020 in the U.S. and Japan.
Lo emphasized that finance doesn’t have to be a zero-sum game. With the right tools, impact investing can be profitable without sacrificing social responsibility.
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