Capital pricing dilemma – reconciling social and financial returns

Impact investing – a way of investing that deliberately seeks positive social or environmental benefit alongside financial returns – is frequently described as an investment approach that requires an implicit trade-off between social and financial returns. This trade-off, if and when it occurs, could be described as the Implied Impact of investments – “implied” because it is only a financial inference to the potential for non-financial benefit (or the perceived associated financial risks) as a result of this explicit social or environmental focus.

In this case, the trade-off could be described as the Implied Impact of investments – “implied” because it is only a financial inference to the potential for non-financial benefit (or the perceived associated financial risks) and not an actual measure of the explicit social or environmental benefit.

This capital pricing spread has been recognised by pundits but until now it has not been satisfactorily reconciled in relation to conventional investment strategies.

Implied Impact seeks to do this.

It is also seeks to provide a quantitative basis with which to either weight the financial performance of impact investments or conventional investments for an explicit impact focus (or lack of it) so that they can be compared on a like-for-like basis.

This dilemma regarding capital pricing of impact investments has been documented by others, for example:

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