Impact as a source of alpha? The elephant in the room
A new study by Schroders and Oxford University’s Said Business School – drawing on data from hundreds of firms and over a decade of performance – provides evidence that impact can be a source of alpha.
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Read the summary here.
Read the full research paper here.
Investors have long assumed that impact investing means sacrificing financial returns in favour of purpose—it's the "elephant in the room". But that hasn’t been our experience at Schroders. And now, our research in partnership with the Oxford Saïd Business School’s Initiative for Rethinking Performance (ORP) provides new evidence that impact investments are not only viable but can also be a driver of alpha under the right conditions.
A key factor in this analysis is impact materiality—the extent to which a company’s revenue is derived from products or services delivering positive impact. Our findings demonstrate that firms with higher impact materiality tend to exhibit stronger financial performance, with evidence suggesting a statistically significant relationship between impact materiality and excess returns.
The study challenges outdated notions that impact investing must come at a financial cost and instead highlights how impact-driven businesses exhibit characteristics that contribute to their financial strength, such as higher operating margins, stronger workforce growth, and a reinvestment focus.
What is impact investing anyway?
Impact investing and ESG investing are often confused, but they serve different purposes. Sustainable investing focused on how a company operates—its governance, risk management, sustainability practices and stakeholder relationships. Impact investing, however, is about what a company does—delivering measurable positive outcomes through its core products and services1.
The market for impact investing has expanded rapidly in recent years and reached $1.57 trillion in 2024, representing a 21% compound annual growth rate (CAGR) since 20192. Despite its growth, a significant research gap remains in understanding the financial performance of impact investing. This study aims to bridge that gap by evaluating whether impact investing in listed equities can generate risk-adjusted financial returns while delivering measurable social and environmental outcomes, and ultimately by exploring the key mechanisms through which impact-driven businesses deliver strong financial performance.
Section 1. Methodology: how the study was conducted
Analysing 257 impact companies, we assess whether they outperform traditional benchmarks using asset pricing models and regression analysis. We control for key financial drivers—size, value, momentum, profitability, and investment factors—to determine if impact firms generate alpha, independent of their risk characteristics. By introducing impact materiality as a potential return driver and incorporating real-world case studies, this research provides a data-driven look at the financial viability of impact investing in listed equities.
A persistent assumption in financial markets is that impact investing requires sacrificing returns in favour of purpose. To test this, we analyse the performance, risk profile, and financial drivers of impact firms versus the MSCI ACWI IMI benchmark.
The analysis covers 257 impact firms that have been approved through a proprietary Impact Framework developed in close collaboration with BlueOrchard, the specialized impact investing asset manager of Schroders Group. The selected impact firms span developed and emerging markets across various market capitalisations and sectors. Read the full report for a detailed breakdown of geographies and sectors.
i) Descriptive findings: Raw performance and portfolio characteristics
We first construct ten randomly selected impact portfolios, each comprising 40 equally weighted firms drawn from Schroders’ approved 257 impact firm universe. These portfolios are compared against the MSCI ACWI IMI to assess their total return performance. Since the impact portfolios are backtested using firms that exist today, they inherently suffer from survivorship bias. To create a more accurate comparison, we also analyse a subset of the ACWI IMI "survivors"—firms that remain in the index today, after being backtested from 2010.
Additionally, we construct market value-weighted and equal-weighted impact portfolios that include all 257 impact firms. This allows us to compare impact firms' portfolio characteristics—such as volatility, return distribution, and risk-adjusted performance—against both the full ACWI IMI and its surviving constituents.
ii) Regression analysis: Adjusting for risk and market factors
While raw performance provides a preliminary view, it is essential to determine whether impact portfolio outperformance stems from genuine alpha generation or is simply explained by exposure to traditional risk factors. To account for this, we apply asset pricing models and regression analysis, controlling for:
- Market risk – Is impact portfolio performance simply due to sensitivity to market movements?
- Size (SMB factor) – Are impact firms benefiting from a small-cap premium?
- Value vs. Growth (HML factor) – Is performance driven by a tilt toward growth or value stocks?
- Momentum (WML factor) – Are past winners driving performance?
- Profitability (RMW factor) – Are returns linked to exposure to highly profitable firms?
- Investment ( CMA factor) – Does performance reflect a preference for firms with conservative or aggressive re-investment strategies?
iii) Identifying the drivers of financial return
Beyond asset pricing models, we examine firm-level financial characteristics to understand why impact firms perform the way they do. Using logit regressions, we compare the financial traits of impact firms to those of non-impact firms in the MSCI ACWI IMI to assess whether impact firms exhibit distinct operational and financial traits that contribute to their outperformance.
To further understand the financial drivers of impact firms, we regress monthly excess returns on key fundamental firm characteristics commonly linked to stock performance in prior literature. We introduce impact materiality—the percentage of a company's revenue derived from products or services aligned with its core impact intent—as a potential performance driver. Our analysis tests whether firms with higher impact alignment generate superior financial returns, even after accounting for other financial characteristics.
iv) Adding real world insights
To complement the quantitative findings, we include firm-specific case studies, examining how companies successfully align impact objectives with financial performance. These case studies provide real-world context to the statistical trends observed in the dataset.
Section 2. Results: breaking the trade-off myth
Having established our research approach, we now assess whether impact portfolios deliver competitive financial performance. This section examines total return performance, risk-adjusted returns, and portfolio characteristics, comparing impact investments against traditional benchmarks to determine whether their outperformance stems from intrinsic financial qualities or systematic market factors.
We further apply asset pricing models and regression analysis to assess whether impact-driven returns persist after adjusting for traditional risk exposures, such as size, value, and momentum factors. Lastly, we analyse firm-level financial characteristics, including return on equity, capital efficiency, and impact materiality, to identify the key drivers of financial performance in impact investing.
i) Evaluating Raw Performance and Portfolio Characteristics
Impact portfolios don’t just keep up with traditional benchmarks—they can even outperform them. Our analysis of ten randomly selected impact portfolios shows that eight out of ten exceeded the returns of the MSCI ACWI IMI survivors index from 2010 to 2023. The impact portfolios demonstrated stronger absolute and risk-adjusted performance, lower market sensitivity, and greater resilience in downturns. Further analysis is needed to determine whether these results stem from intrinsic qualities or systematic risk exposures.
To assess total return performance, we construct ten randomly selected impact portfolios, each containing 40 equally weighted firms drawn from Schroders’ 257 approved impact firm universe. Firms are selected with replacement, meaning some companies may appear in multiple portfolios. These portfolios are compared against the MSCI ACWI IMI to evaluate performance over time.
Since impact portfolios are back-tested using firms available as at Q3 2024, they inherently suffer from survivorship bias—the tendency for only successful firms to remain in the dataset. To account for this, we introduce a more comparable benchmark, the ACWI IMI survivors, which includes only the firms that have remained in the ACWI IMI since 2010.
Figure 1: Total return of impact portfolios (January 1 2010 - December 31 2023)
Figure 1 (above) shows the results. Notably, eight out of ten impact portfolios outperform the ACWI IMI survivors over the 2010–2023 period, with several exhibiting significant outperformance and only two underperforming the survivors' index.
To assess whether this outperformance is associated with higher risk, we compare the portfolio characteristics of equal-weighted and market value-weighted impact portfolios (including all 257 firms this time) against traditional benchmarks.
Table 1: Portfolio characteristics of impact firms versus benchmarks
The results reveal that the impact portfolios consistently outperform traditional benchmarks in both absolute and risk-adjusted terms:
- Higher Annualized Returns & Alpha – Impact portfolios deliver returns of up to 15.9%, with 3-Factor and 5-Factor alphas exceeding 9% and 10.2%, respectively.
- Superior Risk-Adjusted Performance – Sharpe ratios of up to 1.31 indicate higher returns per unit of risk compared to traditional benchmarks.
- Lower Market Sensitivity – Impact portfolios exhibit lower beta than the MSCI ACWI IMI, suggesting reduced exposure to broad market fluctuations.
- Resilience in Market Downturns – Maximum drawdowns for impact portfolios (-17.5% and -17.6%) are smaller than the benchmark's -20.7%, indicating better downside protection. Value-at-Risk (VaR) metrics reinforce this trend, suggesting slightly lower extreme loss potential.
- Moderate Skewness – While all portfolios show negative skewness, the market cap-weighted impact portfolio shows the mildest negative skewness (-0.274), implying more stability.
These findings challenge the notion that impact investing requires financial sacrifice, suggesting that impact portfolios demonstrate strong return potential and resilience. However, to determine whether these results stem from intrinsic qualities or systematic risk exposures, further regression analysis is required.
ii) Regression analysis: adjusting for risk and market factors
Even after controlling for market risk, size, and value factors, impact firms generate statistically significant alpha. They capture more upside in strong markets while cushioning losses in downturns, showing unique resilience. Momentum effects are insignificant, suggesting that returns are not driven by past winners, but based on strong business fundamentals.
While impact portfolios exhibit strong performance, it is essential to determine whether their excess returns stem from intrinsic impact characteristics or exposure to traditional risk factors. To assess this, we apply asset pricing models and regression analysis using the Fama-French five factor model alongside momentum adjustments, controlling for market risk, size, value, profitability, investment, and momentum factors.
- Regression results confirm that impact portfolios generate statistically significant alpha, with monthly excess returns averaging around 1%. This suggests that impact investments deliver returns beyond what is explained by market risk, size, value, profitability, and investment factors. However, potential survivorship bias must be considered when interpreting the magnitude of these results.
- The market risk factor (Mkt-RF) is consistently positive and significant, indicating that impact firms are correlated with broader market movements.
- The sensitivity of impact firm returns to market risk is lower during recessions compared to expansions, suggesting that these firms capture more upside in strong markets while experiencing smaller declines in downturns. This pattern aligns with the low betas reported in the previous section, highlighting a more asymmetric market exposure.
- The value factor (HML) is negative, indicating that impact firms are more aligned with growth stocks rather than traditional value investments.
- A strong size effect (SMB) confirms impact firms are predominantly small companies, contributing to their return profile.
- Momentum effects are insignificant, suggesting that returns are not systematically driven by past winners or losers, meaning historical performance does not play a dominant role in explaining returns.
- Profitability (RMW) and investment (CMA) factors show weaker significance, indicating impact portfolios are not systematically tilted toward high-profitability or conservative investment strategies.
Overall, these results suggest impact alpha beyond traditional risk factors. Impact firms track market movements but capture more upside in expansions while limiting downside, enhancing stability. Outperformance holds across countries, sectors and time.
iii) Identifying the drivers of financial returns
What sets impact firms apart? Our analysis reveals they operate with stronger margins, expand their workforce faster, and actively deploy capital—traits that signal long-term growth. They hold lower cash reserves, raise capital more frequently, and have higher asset tangibility, reflecting their focus on scaling. Crucially, impact materiality—how much of a company’s revenue comes from impactful products and services—emerges as a key statistically significant driver of excess returns.
To further explore what differentiates impact firms from the broader market, we analyse their financial characteristics relative to MSCI ACWI IMI constituents. Using monthly logit regressions, we assess whether impact firms exhibit distinct operational and financial traits that contribute to their outperformance.
The results indicate that impact firms stand out in several ways:
- Operational efficiency and workforce growth – They demonstrate higher operating margins and faster employee growth, suggesting stronger business fundamentals and active expansion.
- Capital structure and financing – Impact firms tend to deploy capital more actively, holding lower cash-to-assets ratios while raising equity and debt more frequently, reflecting their growth-oriented nature.
- Higher asset tangibility – These firms have a greater proportion of tangible assets, likely due to sector exposure (e.g., renewable energy, infrastructure) and early-stage growth dynamics.
- Higher valuation multiples – Impact firms exhibit lower free cash flow and earnings-to-price ratios (or a higher price-to-earnings ratio), aligning with the characteristics of high-growth companies.
Overall, these findings suggest that impact firms are distinguished by their strong operating margins, increased access to external financing, active workforce expansion, and capital deployment strategies. While traditional revenue growth metrics may not show a clear acceleration, the combination of higher equity and debt issuance, increased employee growth, and financial positioning indicates that these firms are actively building scale and investing in long-term expansion.
Impact materiality as a performance driver
To further understand the financial drivers of impact firms, we regress monthly excess returns on key fundamental firm characteristics commonly linked to stock performance. A central variable in our analysis is impact materiality, which measures the percentage of a company’s revenues derived from products or services delivering positive impact. By incorporating country and time-varying sector controls, we aim to isolate the relationship between impact and financial returns.
Our analysis reveals that impact materiality plays a significant role in financial performance, alongside other key firm characteristics that influence excess returns:
- Higher impact materiality (firms with a higher percentage of revenue tied to impact) is associated with higher excess returns, independent of other financial characteristics. Regression results indicate a positive and highly significant relationship between impact materiality and stock performance. The coefficient for impact materiality is 0.012 and statistically significant at the 1% level. Our findings suggest that firms with 100% impact-aligned revenues earn approximately 1.2% higher monthly excess returns than firms with no impact alignment. Caution should be used when interpreting the magnitude of the excess returns given survivorship bias inherent in the impact portfolio. These empirical tests do not allow for a causal interpretation, and it is possible that impact materiality correlates with other financial or quality characteristics not controlled for in the regressions.
- Higher return on equity (ROE) and lower cash flow volatility are associated with stronger returns – This aligns with the expectation that firms with stable and efficient capital deployment tend to outperform.
- Firms with higher sales growth, capital expenditure (CapEx) growth, high dividend yield, and high operating cash flow-to-price ratios exhibit lower excess returns. While these characteristics often signal expansion, they do not necessarily translate into superior stock performance in this sample. This suggests that rapid investment and dividend payouts may not be the primary drivers of success for impact firms. These findings indicate that high impact materiality alongside financial stability and efficiency—rather than aggressive expansion alone—contribute to impact firm outperformance.
iv) Case studies: adding real world insights
Beyond the numbers, real-world case studies highlight how impact-driven companies translate purpose into profit. Schneider Electric leads the low-carbon transition, leveraging digital energy solutions to drive efficiency and strong financial performance, with EBITA margins exceeding 17%. Gentera, a microfinance leader in Latin America, proves that financial inclusion fuels both social impact and profitability, consistently delivering double-digit loan growth and an ROE above 20%.
While the quantitative analyses establish an association between impact alignment and financial performance, they cannot fully capture the operational nuances or strategic decisions that drive this relationship. To complement these findings, this study includes case studies of individual firms that successfully align impact objectives with competitive financial returns.
Schneider Electric: enabling the low-carbon transition
Schneider Electric has positioned itself as a leader in digital energy solutions, helping businesses optimize energy efficiency and reduce emissions. The company’s EcoStruxure platform integrates digital and electrification technologies to enable smarter, more sustainable energy management.
Financially, Schneider Electric has delivered strong performance. In 2022, the company achieved 12.2% organic revenue growth, with EBITA margins exceeding 17%. With increasing demand for sustainable solutions, Schneider is well-positioned for future growth.
Gentera: financial inclusion as a growth engine
Gentera, a Latin American microfinance institution, focuses on providing credit and financial services to underserved populations, particularly women entrepreneurs. By expanding access to credit, Gentera promotes economic empowerment while maintaining strong financial performance.
The company has consistently achieved double-digit loan growth and maintains a return on equity (ROE) above 20%, demonstrating that financial inclusion can be both impactful and profitable.
Section 3. Conclusion and key takeaways
This study challenges the long-standing assumption that impact investing requires financial trade-offs. Our findings demonstrate that impactful companies can deliver competitive financial performance, with portfolios exhibiting higher risk-adjusted returns, lower volatility, and resilience across market cycles. By examining total return performance, risk-adjusted returns, and fundamental financial drivers, we provide evidence that impact alignment can be a source of alpha rather than a constraint on performance.
Key takeaways
- Competitive returns: The study found that impact portfolios delivered strong absolute and risk-adjusted returns, exhibiting statistically significant alpha that is unexplained by traditional risk factors.
- Lower risk and enhanced stabiity: Impact portfolios exhibited lower volatility, smaller drawdowns, and reduced downside risk compared to the benchmark, indicating greater stability.
- Resilience in market cycles: Impact portfolios showed strong performance during recessions, with defensive characteristics in sectors like healthcare and industrials. Their sensitivity to market risk is lower in recessions than in expansions, meaning they experience smaller declines in downturns while benefiting more from strong markets.
- Impact materiality as a source of alpha: Companies with higher revenue alignment to impact generated superior financial returns, suggesting that impact itself can be a driver of financial performance.
These findings suggest that impact investing can deliver strong risk-adjusted financial returns, with impact itself acting as a driver of alpha in the right conditions. However, not all impact investments will outperform. Success depends on thorough selection and evaluation, ensuring that financial strength and impact reinforce—rather than compete with—each other. When aligned, they create meaningful long-term value creation. For investors who get it right, impact is not only a purpose-driven choice, but also a financially attractive investment opportunity.
Sources:
1Impact investments are investments made with the intention to contribute to positive, measurable social or environmental impact alongside a financial return.
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