Who Should Lead the Charge in Impact Investing?

By Connor Schoen

From pension funds, like CalPERS and CalSTRS, to boutique firms, like Tideline and Arctaris, the pioneering leaders of impact investing range from large institutional investors to smaller firms who specialize on social impact.

Who should be leading this movement? While large institutional investors might have the most capital to invest, some say that their responsibility to provide consistent, larger returns (i.e., pension payments) impedes them from being successful, effective impact investors. Namely, in a report released last year by the American Council For Capital Formation (ACCF), a Washington-based think tank, claims that the California Public Employees’ Retirement System (CalPERS) is underperforming financially because of their impact investing strategies. Vice President of the ACCF, Tim Doyle, claims that weak public pension fund performance like this is exacerbated by “the growing tendency on the part of those who lead many public pension funds to use beneficiaries’ money as a vehicle to champion certain political causes and issues at the expense of doing what’s necessary to improve fund performance.”

So are long-term, large funds like CalPERS, with around $300 billion assets under management, simply incapable of being effective impact investors? According to the spokesman of CalPERS, Joe DeAnda, funds like theirs have a duty to consider environmental, social, and governance principles (ESG metrics): “[CalPERS has] successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially.”

Most investors acknowledge some trade-off between returns and societal impact, but funds like CalPERS are important in showcasing how they are not mutually exclusive. Also, a report from Morningstar, a Chicago-based investment research firm, claims that “academic and industry studies are demonstrating that sustainable investing does not underperform conventional investing, and there is mounting evidence that incorporating environmental, social, and governance factors can have a positive impact on performance.”

Moreover, according to David Bank from ImpactAlpha, utilizing sustainable investment techniques help funds like CalPERS, who “own the market,” to mitigate a variety of environmental and governance risks in the long term.

So maybe CalPERS isn’t seeing its highest returns today, but time will tell if their ESG-centric approach to investment will enable enhanced success in the long term. In the meantime, boutique firms may be the only ones who can effectively leverage the impact investing mission, but large institutional investors are the only ones who can push this to the mainstream.