Profit Without Purpose? Do Impact Scores Matter for Portfolio Performance in Public Equity Markets?

Abstract

This thesis explores whether an impact investing approach can generate positive alpha beyond traditional risk factors for companies in the S&P 500 (2010-2024). The thesis addresses the limited quantitative literature on impact investing, which often finds financial underperformance despite its conceptual goal of achieving both social and environmental impact alongside financial returns (the “double bottom line”). We develop firm-level impact scores that are aligned with the IRIS+ guidelines and the United Nations Sustainable Development Goals (SDGs), using both a manual scoring approach and a principal component analysis (PCA) based method to limit the influence of subjectivity. Based on these scores, we construct portfolios by classifying firms into top and bottom deciles (and later quintiles). We evaluate the constructed portfolios’ performance using known asset pricing models such as the CAPM, Fama-French Three- and Five-Factor models, and the Carhart Four-Factor model. To test the reliability of our results, we perform a robustness check across different subperiods and impact score thresholds. Our key findings indicate that the Bottom Decile portfolio (lowest-impact firms) consistently outperforms both the Top Decile portfolio (highest-impact firms) and the S&P 500 benchmark. Under the Fama-French Five-Factor model, this low-impact portfolio achieves an annual statistically significant alpha of 7.92%. The Top Decile portfolio produces no significant returns, but also does not underperform on a risk-adjusted basis, implying that its financial performance is comparable to our market benchmarks (S&P 500). We found that these results hold across both scoring methods. This thesis contributes to the academic literature by demonstrating that impact investors pursuing impact objectives do not have to compromise financial returns, as a high-impact portfolio does not underperform on a risk-adjusted basis, challenging what previous academic literature has stated. Additionally, we find that investors focused solely on financial performance can earn abnormal returns by investing in a low-impact portfolio, which raises questions about the Efficient Market Hypothesis and how well impact-related information is priced by the market.