Posted on October 22, 2015

Pushing the Boundaries of the Wharton Study on Impact Investing

Posted by: Laurie Spengler, President & CEO

Do I make money or do I support a good cause? For too long investment decisions have been reduced to a clear cut choice between two assumed extremes: greatest possible financial return versus greatest possible charitable impact.

The Wharton study, Does Social Impact Demand Financial Sacrifice?, highlights the need to think beyond the landscape of extremes. But does it go far enough in looking at investment choices? I believe that there is another decision tree that allows an investor to deploy capital in a manner consistent with her objectives; a decision path that takes advantage of the expanding universe of investment opportunities falling between the extremes of making the most money she can or giving her money away to a good cause.

At Enclude, a specialist advisory intermediary in responsible, sustainable and impact investing, we describe total return as the sum of the financial, social and environmental benefit arising from an investment. In this blog, I would like to offer a continuum of thinking sparked by the Wharton study that calls for a fresh analytical framework to help investors answer the question “what can I expect to achieve through this investment beyond making money?”

Investigating new investment landscapes

As investors, we too often use different lenses to decide, investing without regard to considerations for how the return is generated, and donating for good causes without regard for optimizing financial results. But we no longer live in a bifurcated world that forces such extreme choices.

For example: in my financial institutions portfolio, do I invest in a bank that avoids making loans to entrepreneurs in its local community and make a donation to a community foundation or do I make an investment in a community bank serving local entrepreneurs responsibly and profitably? Do I hold a portfolio of energy assets that remain linked to fossil fuels and make a generous donation to a wildlife preservation charity or do I invest in a clean energy fund where all the assets are invested into companies that are lowering our carbon footprint?

What was once a landscape of extreme choices is now populated by a growing universe of investment opportunities that invite us to put money to work effectively, efficiently and with purpose. Opportunities include public and private exposure as well as funds and direct investments spanning different risk, return, liquidity and impact profiles in multiple sectors and across geographies. The objective is to identify the drivers of return and allow investors to make informed choices as to the combination of returns an investor seeks through investing capital.

Today, there is an expansive field of activity in the middle that beckons our thoughtful participation and intelligent scrutiny. Impact investing is an effective approach to navigate this big, bold world to put capital to work with an explicit expectation to generate positive social and environmental results.

Dissecting “total return”

The field of impact investing is growing rapidly.  The good news is that more and more investors are asking about social and environmental results linked to their capital investments – not just for a segment of their portfolios, but across their entire investment portfolio. At the same time, there is a desire to measure and rank impact investing opportunities against investments that do not consider elements beyond financial return.

The power of impact investing is grounded in an understanding of “total return” – what can be achieved beyond financial return when deploying capital. Impact investing, which draws from financial best practices underway for decades, is an approach to deploying capital in ways that generate positive – and measurable – social and environmental results in addition to financial returns.

Benchmarking in context

Benchmarking is a helpful tool if it is used in a manner consistent with its intended purpose. The Wharton study makes huge strides towards debunking the myth that impact investments can never deliver commercial rates of return. We celebrate this study and hope it will lead large, institutional pools of capital to look beyond pure financial returns to consider the social and environmental derivatives their investments drive – some of which, ironically, investors later ameliorate through their own charitable giving.

At the same time, it is important to recognize the limits of any study in drawing conclusions for a field as dynamic and diverse as impact investing. Simply put, the study should not collapse impact investing into an investment imperative that all impact investing funds can and therefore should generate commercial returns simply because one segment of such funds has demonstrated comparable returns. This leaves out critical, non-commercial and commercial activities that took place before, around, and alongside the impact funds Wharton studied, building markets that substantially contributed to these funds’ financial returns, risk profiles and exit opportunities.

In reviewing the Wharton study, we should be careful to understand the narrow and specific sliver of the impact investing universe it endeavored to analyze – and within that sliver, the question that was the focus of inquiry. Fundamentally, the study began by examining what happens at the moment of exiting an impact investment, and what that contributes to the financial returns of the impact investors. The question of exits across all impact funds is an important one, probing the decision calculus used in considering purchase offers in order to analyze the likelihood of change in trajectory of the operating business once the impact investor exits. The study’s approach, however, focuses on a particular segment of impact funds and explicitly excludes a wide variety of impact investors who play at different stages of market development, in different segments of the capital stack.

As an active intermediary in the expanding impact investing industry, we welcome the rigor and analytical methodology of academic institutions such as Wharton. At the same time, we acknowledge the importance of considering the results of any study within the parameters of its scope. We also recognize the need to continuously probe an investigation and ask further questions. In this case, new questions to be examined include the criteria for selecting and analyzing funds that self-identify as “impact funds” and assert commercial rates of financial return, the segment of enterprises targeted by specific impact funds both in terms of sector and stage of life of the enterprise, the geographic market in which impact funds operate, the fees associated with impact funds, the scope of advisory and investment activities undertaken by impact funds, and the measurement frameworks utilized by such funds to be accountable to investors for the targeted “total return”.

The danger of benchmarking is that early conclusions can obscure nuanced and important questions to be answered. This is certainly true of impact investing, an investment approach that is gaining recognition and triggering important questions that warrant thoughtful analysis and discussion. The specific investigation of the Wharton study to debunk a closely held myth about impact investing returns should not be over-interpreted to reduce the power of impact investing as an investment methodology to merely investments that can deliver commercial returns.

Pushing beyond traditional thinking

The call to arms for impact investing is not enough. This is not about labels or hype; it is about analyzing and understanding the social and environmental consequences that arise from investing into any business.

Impact investing invites us to reframe the investment paradigm. Through this investment approach, we extend the traditional two dimensional paradigm of investing that considers risk and return to a three dimensional paradigm that considers risk, return and impact. The traditional two dimensional paradigm ignores both negative social and environmental results as well as the possibility of positive results. It traps us between the sharp bookends of commercial maximization and charitable giving.

If we want a set of outcomes from investing our money that yields positive social and environmental results then we need to be prepared to challenge the limitations of “traditional thinking.” We need to push beyond the boundaries of current capital allocation discussions and decisions. Traditional investment thinking serves only to perpetuate a bifurcated choice between commercial maximizing and charitable giving.

The spectrum of impact investing opportunities is both wide and deep, spanning an array of “total return” propositions.  With confidence, critical thinking and courage in our capital decisions we can change the way we invest capital. As we build a community of actors, I look forward to the day when we are no longer debating the rationale explaining our decisions but sharing the extraordinary positive achievements our investment decisions have spurred.


Laurie Spengler is President & CEO of Enclude, a specialist advisory intermediary in bringing to market inclusive, sustainable and impact investment business solutions and capital transactions. More information about the firm can be found at: Additional articles and interviews on impact investing, including the importance of responsible exits, can be found on: The Skoll World Forum and Upsides.

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