When the Goal Is Impact, Investors Can’t Just Consider Rate of Return

For some investors, social change might be a more important metric than financial gains, says director of new certificate program in impact and sustainable investing

With savings for your retirement, you might want to put it into investments that reflect your values. But what would that entail? Would you avoid certain companies, like tobacco and firearms manufacturers? Or screen companies on specific criteria, like their impact on the environment? 

Jeff Rosen, director of a new certificate program in impact and sustainable investing at Tufts, says such approaches are a good step, but “they may not be enough to finance the change we need.” He suggests that those who call themselves impact investors consider a more radical move—tempering their expectations for a high rate of financial return to have a more positive impact. 

Trying to make your money earn the most it can is understandable, especially if you’re counting on it for your retirement, but chasing such goals comes at a cost, says Rosen, Jason and Chloe Epstein Term Professor of the Practice in the Department of Urban and Environmental Policy and Planning.

He poses this question, rarely if ever heard in investment circles: What is the right rate of return? The S&P 500 index has grown 11.3% annually over the past 50 years, but from Rosen’s perspective, “it’s been too high, because it’s been too extractive and damaging on our ecosystem and community infrastructure.”

Moving from investing in established companies with relatively defined markets and financial returns—like those found in the S&P 500, the largest public companies in the U.S.—to newly established companies working on climate change, he says, changes the risk-reward equation.  The same is even more true with community investing—putting money into local small businesses. 

“If you are willing to accept less predictable returns, how much impact do you expect to get?”

Jeff Rosen

“For example, for those interested in investing in climate, track records are less established,” says Rosen, who has worked as a chief financial officer at firms and helped run a philanthropy. “It’s a riskier part of publicly traded portfolios. And if you are willing to accept less predictable returns, how much impact do you expect to get?”

Before posing such questions, Rosen details the history of socially responsible investing, which gained popularity some 30 years ago. Mutual funds with that focus excluded companies that were judged as doing more harm than good—tobacco, firearms, and private prison firms, for example—and helped investors feel better about their stock market holdings.

More recently, funds focused on ESG—environment, social, and governance—issues have risen to prominence. Proponents of ESG state that there are now trillions of dollars of impact investments using this strategy. However, ESG funds have been criticized in the press as a way of “greenwashing” some companies—making investing options seem more acceptable by declaring they meet certain standards, while covering up reasons they might be unpalatable. 

Getting Investments to Yield More Impact

Rosen says that the fact that investment firms are using ESG criteria to select investment options is a good step, and an indicator of how many people want to align their investments with their values. But it still falls short of having true sustainable investments that make a positive impact on the world, dealing with issues like climate change, he says. And, he adds, “I think those who invest in ESG strategies would like to see more impact from some of those investments.”

For instance, deciding not to buy an oil company stock doesn’t really affect the oil company, and won’t change its behavior. “When you invest in a publicly traded company, you’re buying your stock from someone else, not from the company,” Rosen says. “For the Exxon Mobils of the world, it’s not less money in their bank account if someone ran a significant divestment campaign against them.”

But there are other ways to invest in accordance with your values. In a class he taught this fall, Catalytic Capital, Rosen offered a blueprint for what he might deem true impact investing—but it does come at a cost. Namely, he suggests that perhaps those who call themselves impact investors can no longer seek to maximize their returns for the entirety of their investment portfolio. 

“I’m not very radical,” he says. “I don’t have a vision of the world that’s very different than the one we’re in.” The key difference, he says, is what rate of return investors would be expecting, if they want to support impact.

In the Catalytic Capital class, he took his students through an exercise around just this question. Starting with the premise that there is a 7.5% return on a standard retirement portfolio (a mix of stocks and bonds), he asked, “what if instead you put all your retirement money in an impact fund that earns a 2% annual return?”

Investing all of one’s retirement assets into lower-return, impact-first vehicles could mean having much less money at age 65 than investing in a standard stock fund. It’s a sobering thought, he notes, and might not be financially realistic for everyone. But, Rosen points out, the investments would have at least potentially done more good in the world. 

An alternative, Rosen says, is to consider taking a smaller percentage of one’s overall investment portfolio and knowingly investing it in riskier and lower-reward entrepreneurs who are focused on, say, mitigating climate change. “We don’t need trillions of dollars for that today—hundreds of billions would be really catalytic to get some of the change-making both at the community scale and the kind of middle scale,” he says.

For some of the most direct and obvious impact, investing at the community level is a good approach, too, he notes. “Young people in the community might want to start a change-making business—say, a recycled clothing hub—and want to pay a fair wage, pay their supply chain well, have a photovoltaic installation on their roof, and still be profitable,” Rosen says. 

Investing in those community businesses is one way to have the most impact for each dollar invested. 

“While all types of impact investing are going to be critical, I’m focused more on those that focus on change first, rate of return second,” Rosen says.

Back to Top