Risk and return of impact investing: Quantitative analysis of open-end impact funds in the USA and Europe over the period 2014-2018

The impact investing industry has boomed in recent years. Reconciling philanthropy with financial performance, impact investing is considered as an opportunity for achieving the United Nations Sustainable Development Goals (GIIN, 2017), thereby contributing to a better world, joining the worldwide battle for the planet, poverty, peace, and prosperity (United Nations Development Programme, n.d.). While the use of impact funds is on the rise, quantitative analysis of their performance is lacking. Therefore, this is thesis aimed at answering the following research question: “What are the risks and return of open-end impact funds in the USA and Europe over the period 2014-2018?” The methodology applied was, using longitudinal data, to analyze the results through Jensen’s alpha (1968) and its generalization, the Fama-French three-factor model (1992, 1993), Cararth four-factor model (1997) and Fama-French five-factor model (2015), supplemented by simple and multiple ordinary least squares linear regression, with the method enter. The risks were analyzed through the standard deviation of returns, the EWMA, and the GARCH(1,1) variance. The results of the risk-return analysis of impact funds over the 2014-2018 period enabled to determine that, in overall, European open-end impact funds presented returns significantly in line with the market rate of return at a 1% confidence level while US open-end impact funds presented returns significantly different from the market at a 5% level, with an average Jensen’s alpha of -1,29%. Overall, the risk of open-end impact funds tended to be higher than those of the market, both in the USA and in Europe, over the 2014-2018 period. The evolution of the GARCH(1,1) volatilities indicated impact funds volatilities to be higher than the market at frequencies higher than 70% for all the countries, except Belgium.