In Search of Gamma: An Unconventional Perspective on Impact Investing

Uli Grabenwarter, Heinrich Liechtenstein
IESE Insight
Publication date
November 2011
SRI/Sustainable Finance
Free/Pay for content
Based on interviews with more than 60 dedicated impact investors, the authors present an innovative approach for clarifying the fundamentals of impact investing and addressing the challenges of impact and performance measurement.

The Tricky Business of Measurement
Measuring the performance of one’s investment is often easier said than done. On the financial side, the lack of cost transparency and the prevalence of cross-subsidizing or understating mean that real costs are often not reflected accurately.

When it comes to measuring the nonfinancial part of investment performance, one of the greatest obstacles to impact investing is the inadequacy of the measurement tools currently in use.

For example, in the clean-tech area, broad-brush CO2 statistics are so generalized for the sake of uniformity as to be meaningless in an investment decision process. These difficulties are further exacerbated by the absence of a generally accepted industry standard to measure impact performance.

The main challenge, therefore, is to find a suitable measurement tool that is widely accepted by the various stakeholders in the investment process.

The Gamma Factor
To address this challenge, the authors propose the gamma factor to measure impact investment performance. They suggest using the gamma factor as a multiplier for deriving the return of an investment, and they call the outcome the “impact-adjusted return.”

Just as alpha and beta in the Capital Asset Pricing Model (CAPM) can help to determine the financial return of an investment, taking into consideration the assets risk profile, the gamma factor integrates an investment’s social or environmental impact into the performance assessment.

At the very least, a smart use of impact funding might help preserve the scarce resource of philanthropic funding for areas that cannot be addressed with a market-based investment approach.

The authors help to clarify some of the misconceptions that have held back impact investing from entering mainstream markets, and they propose solutions to bridge the current standardization gap.

Most importantly, their report should help inform investors on ways of capitalizing on the full potential of this emerging asset class.