September 28, 2023

FDI Forum

Earn the right Invest

Impact Investing Strategies for Achieving Social and Financial Returns

Although the field of impact investing has experienced astounding growth over the past decade, there remain concerns about its ability to generate both outsized financial and social returns. Can investors achieve their desired social or environmental impact without sacrificing their financial goals? What are the differences between ESG, sustainable investing, and impact investing? How do investors evaluate impact? To better understand what an effective impact investing strategy might look like, SSIR publisher Michael Gordon Voss speaks with Juliette Menga, an investment director and chair of the ESG Committee at Aetos, and Nitin Barve, director of the Schwab Center for Financial Research.

(Scroll further down the page for a full transcript of the discussion.)

After you listen:

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MICHAEL GORDON VOSS:  Welcome to the fourth season of Giving with Impact, an original podcast series from Stanford Social Innovation Review, developed with the support of Schwab Charitable. I’m your host, Michael Gordon Voss, publisher of SSIR. In this series, we strive to create a collaborative space for leading voices from across the philanthropic ecosystem to engage in both practical and aspirational conversations around relevant topics at the heart of achieving more effective philanthropy.

In its broadest sense, the field of impact investing can be defined as an investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact. Impact investing is attracting growing numbers of organizations and increasing amounts of money.

By some estimates, there are nearly 200 registered impact investment funds, and many foundations, networks, and mainstream financial institutions are active in the field. Impact investing contains a range of expectations about appropriate financial and social returns.

Some investors are drawn by the hope of earning substantial financial returns by investing in businesses that have a social mission, while others are drawn by the desire to achieve more sustainable impact than they could achieve through philanthropy alone.

Although the growing interest in impact investing represents an opportunity for the social good sector and an important source of growth capital for social ventures, the excitement that surrounds the field is a growing source of concern for some. Exaggerated claims raise expectations about the ability of impact investing to provide both outsized financial returns and social returns, something that’s not always possible. So what should investors be considering when looking to have a positive impact in the world through their investments? To better understand the growing importance of an impact investing strategy and what this approach means, we’re joined by two analysts working in this space.

Juliette Menga is an investment director and chair of the ESG Committee at Aetos, an investment firm that provides customized solutions for global institutions across traditional and alternative strategies. Prior to joining Aetos in 2020, Juliette was a director of investments at Alternative Investment Group where she launched and co-managed hedge fund strategies focused on ESG and opportunistic investments. Juliette is a member of the Principles for Responsible Investments Hedge Fund Advisory Committee, and served on the PRI Hedge Fund Working Group to develop guidelines for the application of ESG principles to hedge strategies.

She serves on the investment committees of the Nellie Mae Educational Foundation and the Fairfield County Community Foundation, and is a board member of Wholesome Health Promotions, an organization that educates and promotes general wellness, good nutrition, and health practices in rural and underprivileged communities in Cameroon.

Juliette received dual bachelor of science degrees in computer science and mathematics at Kennesaw State University, and a master of science in financial mathematics from Florida State University.

Also joining us is Nitin Barve, director of the Schwab Center for Financial Research. An investment industry researcher and operations executive with over 25 years of experience working with clients and companies across Asia, Europe, and North America, Nitin plays a key role in Schwab’s ongoing market and technology evolution, and oversees the publishing of an array of research, white papers, training programs, guides, and other internal and external investment communications. Prior to joining Schwab, Nitin held key positions at Wells Fargo and Citibank, in addition to being the founding product architect at Finnovative. Nitin is an adjunct lecturer at Santa Clara University here in the Bay Area, and previously taught at St. Mary’s College in San Francisco. Nitin received his MS from the Indian Institute of Technology in Mumbai.

Juliette, Nitin, thank you both for joining me today for our discussion on impact investing. Let’s get started.

Nitin, we’ve had several guests from Charles Schwab & Company on the show before, but not anyone from your team. What exactly does the Schwab Center for Financial Research do?

NITIN BARVE:  Sure. Glad to be here, Michael. Schwab Center for Financial Research, or SCFR as it’s sometimes known as, is kind of the main research group within all of Schwab. And we are tasked with producing insights and ideas to help our investors succeed in their own financial journey. And how we do that is, essentially, through a combination of looking at academic research, doing our own applied research, looking at all the innovation and regulations that are coming up, and providing investors with a lot of content, podcasts, white papers, articles, charts, and especially the rankings and the ratings that allow them to choose the right type of investment products, whether it’s mutual funds, ETFs, securities, individual stocks and bonds, and hedge funds and everything in between. So it’s a very broad-based, research-oriented mandate that my team has at Schwab. Our goal is to help our investors achieve their financial successes.

MICHAEL:  That’s perfect. Thank you for explaining that, Nitin. And since we’re doing introductions, Juliette, would you tell us a little bit about Aetos and what your role is there?

JULIETTE MENGA:  Absolutely. Hi, Michael. Thank you for having me. I’m really excited to be here. So Aetos, we are primarily a hedge fund consultant and advisory firm that was founded about 20 years ago by Anne Casscells and Michael Klein. Anne came from your neck of the words.  She previously ran the Stanford Management Company as a CIO before founding Aetos, and Michael Klein ran the institutional business for Morgan Stanley. At Aetos, we run a wide variety of strategies for our clients, primarily in hedge funds, primarily in custom mandates. And I lead ESG efforts there.

MICHAEL:  And Juliette, sustainable investing seems to be core to the Aetos approach. How do you define sustainable investing and how do you see that as different or similar to impact investing?

JULIETTE:  Sure. So sustainable investing, ESG, I’ll use that interchangeably. But the way we think about it at Aetos, we think about it in two ways. First, at the firm level, in the way we run our business, the way Michael and Anne set up the business was with a very strong focus on culture and people. And that’s one way we think about sustainability investing. We have, for example, which is very unlike most other places, 70% of the employees at Aetos are women or minority. And that’s not something that was done in the last few years. It’s been a thoughtful process since the launch of the firm. And we have several committees that look at the way we think about hiring our employees, carbon footprint, and the sustainability of the business.

And then the other way we think about sustainability is through our investments. And we integrate ESG into our investment process across the firm. We have ratings for the managers in which we invest on how well they integrate ESG into their investment process. And then we also have specific products that focus on ESG and sustainability.

And the way our managers typically do that, I will say they do it in two ways broadly, through what I’ll call ESG integration, and that is looking at material ESG factors as a key part of their investment process. Just the same way as you would look at financial metrics like P/E multiples and cash flow, they’ll look at material ESG factors. And the other way is through what I’ll call thematic investments. And that is focusing on specific areas of sustainability that is attractive from an investment perspective, but also attractive in terms of their impact. For example, if you look at areas like the energy transition, that’s a massive area of opportunity, not only from an investment perspective but in terms of the potential impact in transitioning the world towards a net zero.

And then in addition to that, we also think about specific companies and sectors that managers exclude from their investment universe. Sometimes for value reasons, but also for potential tail risk associated with stranded asset risk or litigation or legal liabilities of those assets. One area that you see excluded are things like firearms or coal companies.

That’s how we think about ESG and sustainability. We think of it as a tool that we use and that our managers use to help make better investment decisions in how we think about risk and opportunities in the portfolio.

To your second question on how it’s different from impact investing, I’ll say that for ESG, we look at it as a tool to help generate better returns and also have some kind of an impact.

With impact investing, there is a strong focus on both the return and the impact of the investment, and both need to be measurable. And in some cases, for impact investments, there is a willingness to have reduced return in order to achieve the desired impact. So the range of return outcomes may be a little bit different depending on the impact investment, but there is definitely a very measurable impact in addition to financial return.

MICHAEL:  I think that’s a great point. It almost sounds silly to say it, but when you’re talking about impact investing, impact is the first part of that kind of equation. And so that’s a good way to think about one of the main distinctions between ESG, or sustainable investing, and impact investing.

I also want to applaud you and Aetos because what you were saying about the sustainability of your business. It’s great when a company walks the walk, as opposed to just talking the talk. So kudos to you and all of your team for that.

JULIETTE:  Thank you.

MICHAEL:  Nitin, let me ask you to comment now. Juliette described Aetos’s approach to sustainable investing and the ESG factors related to that.

And the differences she saw between that and impact investing more broadly. Many investors may also be hearing about socially responsible investing, or socially responsible investments, also called SRIs. How would you define an SRI and what do you see as the difference between socially responsible investing, ESG focused-investing, and impact investing?

NITIN:  Just as Juliette said, let me just start with impact investing. And I think primary distinction between the three approaches is really how much involvement does an investor want to have in the actual impact, or the result, of the investments? And the tradeoff, how much tradeoff do they want to have in terms of financial gains versus the other non-financial returns? So impact investing, not that the investor is sacrificing their financial gains, but as Juliet said, I think the impact, typically on a narrow, more defined community or some aspect of a societal issue is more important and then the financial gains is maybe a little less important, not that they’re giving it up.

On the other hand, ESG and SRI are a little bit similar to each other because they tend to be more broad-based. An investor doesn’t really have to take a very hands-on role in a specific issue that they’re interested in or they care about. They just want to do good while trying to do well. So that can be a broader approach in terms of both ESG and SRI.

The subtle difference or the distinction between ESG and SRI in our minds is SRI tends to be more, what we call, exclusion-based, where an investor say, ‘Yeah, I’m going to invest in all of the US markets, but exclude a particular industry,’ let’s say, tobacco or firearms.

ESG, on the other hand, tends to be more what’s called integrated approach, where we don’t really necessarily say that an industry is, quote/unquote, good or bad, but we just look at it on an industry agnostic basis. And we say, ‘Yeah, within each industry, each industry player has some inherent risks. And it’s a question of how well are they managing those risks and are they really doing the best they can within that industry?’ For example, an oil company, even though we may not like the pollution produced by oil companies, we still have to rely on gas and oil to fly our planes and so on. So ESG tends to be a little bit more broader, more integrated and doesn’t necessarily exclude anything.

So that’s kind of the way we distinguish between impact, SRI, and ESG. And we do see this as a common source of confusion among not only investors but also even industry participants. So I think understanding these distinctions is very important.

MICHAEL:  I want to come back a little later on and dissect a couple of the points that you just brought up Nitin. But before we get to that, can you tell us a little bit about what you are looking for when evaluating companies for impact?

NITIN: What we look at has sort of evolved over years, because first of all, one of the biggest challenges in the industry is the availability of data. There’s no regulatory requirement that forces companies to report or produce their ESG or SRI friendliness. So it’s been historically hard to get the data that you need to do any analysis or evaluations. Now that is changing, of course. Over the recent few years, companies either willingly or through some kind of a regulatory nudge are starting to publish data, but there’s no standardization again across the globe. So there’s a lot of scope for analysis and subjectivity.

A couple of larger, well-known data providers in the financial services industry are starting to develop their own methodologies. So instead of coming up with something that we build, we are starting to lean on more broadly accepted methodologies that these two providers are building. And, again, those two are very large reputable firms, but their methodologies are very different from each other. And it’s not a question of which is better, but is more of a subjective decision to choose the one that aligns more closely with our point of view. So that’s the approach we are taking here.

Both of them, broadly speaking, do look at all the aspects that a company or a particular issuer of a bond has control over, what risk are they exposed to in that industry, whether it’s E or the S or the G pillar, and how are they managing? Are they really proactive? Are they really tight about managing all the risks? Are they financially prepared to take any hit on any of those issues? So there’s a term called issues that one of the providers follows, and they actually track how many issues has a company or bond issuer has had over the years, and how well they were tackled, or how well they were prepared to tackle them even before the issues manifested themselves.

MICHAEL:  Yeah, I think that uniform analysis, or that uniform reporting, is one of the things that we were chatting about, even when we had the rehearsal for today’s session. Juliette, let me ask a similar question to you. What do you think about when you’re implementing the ESG strategy and your investment process?

JULIETTE:  Absolutely. I would say that depending on the strategy, the way you think about ESG integration is going to be very different. For example, if you’re looking at deep fundamental long-short equity strategies is going to be different from a quantitative, more trading-oriented strategy, is going to be different from a macro strategy, and so on.

The way we typically look at it, which at this point, we’re primarily focused on fundamental strategies, our managers all do it differently, but I would say some commonalities among them is that they think about material ESG factors as a key part of their investment process. So, for example, if you have an industrial company the analysis is beyond those financial return, is this an area that’s been impacted by drought? And, if so, what’s the impact on the company on how they use water and the regulation around water in that area? How do they dispose of waste? Do they have some tail risk associated with that if they’re not doing it correctly?

And the way to think about materiality, there are a number of vendors out there that have developed some material ESG issues, typically, starting with certain sectors having a handful of material issues, and then you drill down to the specific companies and focus on those material factors based on the sector and then based on the specific company dynamics.

So the managers who do it right, they tend to look at a combination of those outside vendors, which there are quite a lot right now, from the rating agencies to those focused on AI. So you have some AI mapping tools today that scrub data on the internet, that have scrubbed satellite images, to other frameworks, like the SASB Materiality Framework to understand what those material issues are.

But to Nitin’s point earlier, a lot of this is not commonly rated or the companies are not providing the data in a way that’s easy to compare. So there is currently a real need for managers to do their own analysis on top of that, to normalize that data and use it in a way that’s consistent with their investment process.

It’s a bit of a challenge today, but it’s also the opportunity, right?

JULIETTE: It’s never easy to make good investments. The people who do it well are those that can take, call it the inefficient data, and get some alpha out of it. So that’s how we typically see it today.

So in addition to integrating ESG into the investment process, the other thing which we see in a good ESG approach today is the engagement aspect.  You can appreciate that a lot of companies are just not there today in terms of their ESG integration. So even companies that could be quite thematic, in terms of their impact from an E or S perspective, may need a little help and push on some of the other issues, like the governance or E or S. So, for example, some solar company has clearly a very positive impact, but may have some issues around their supply chain or labor. And so a good engagement program, where you’re not only integrating the ESG factors, but engaging those companies to move in the right direction on those issues, is also what we see and encourage with our managers.

And then the last thing I’ll say is the reporting aspect. So we primarily invest in public markets. With impact investing, it’s a little bit harder to classify the impact, but some kind of an impact reporting, in terms of if you’re engaging with companies, for example, what are the outcomes of those engagements? To the extent that some of your companies are aligned with things like the UN SDGs, how are you reporting that?

MICHAEL:  There’s, obviously, a lot of complexity that you were just sharing with this, about this process, but it makes me wonder how can individual investors think about applying an approach that’s similar to what both you and Nitin have discussed when they’re thinking about their portfolios?

JULIETTE:  For individuals, at this point in time, there are quite a number of products out there that integrate ESG. The advice I would give is to go with an open eye. As we’ve been talking today, there is no standard definition of an ESG fund. You kind of need to do your research to make sure that what you’re investing in is aligned with your thoughts on ESG.

But I also encourage individuals to be open-minded in terms of some of the names that they see in the portfolio, for example. We live in a world that’s fairly polarized and investors are quick to judge names. Obviously, there are some names that are immediately a red flag, but broadly speaking, there’s a lot of room for improvement, especially if you have a good engagement program in some of these funds. At this point, I believe that most investors can transform their full portfolio into sustainable investing products without worrying about the upside or the return potential. So we do have enough of that, but at the same time, we also have some green-washing out there, so you need to do the work.

MICHAEL:  Nitin, anything that you want to add to that point, or to the ideas about ways that individual investors should be thinking about these approaches?

NITIN: That’s a really important question for Schwab because of two reasons. First of all, Schwab has a lot of clients, we are talking about some 30 million clients, and secondly, they present a full range of preferences and interests. There are individual stocks or even bonds, and often bonds are not immediately thought of when someone thinks of ESG or SRI, but bonds actually lend themselves quite well for SRI or ESG investing because in a bond, a bond is actually a legal contract, so in a contract you can have a clause that says if issuer does XYZ, it’s in default. So companies may be a little bit more forced to follow what they’re saying.

In any case, there are ratings available for individual stocks and funds, both at Schwab and at other firms in the industry. And even at Schwab Charitable, for example, we have a number of mutual funds that investors can use across asset classes. For example, there’s a Parnassus Fund that allows investors to do ESG investing through regular traditional large-cap US stocks asset class. If you didn’t know about ESG or if you didn’t care about ESG, that’s still a highly rated large-cap fund but it also happens to be run by a firm that truly believes in ESG right from their inception close to 40 years ago.

There are a couple of other funds, more balanced, there’s a balanced fund or an asset allocation fund that diversifies across stocks and bonds, and that’s run by IMPAX Asset Management. So they are, again, very natively ESG fund. So that’s another fund that’s available. There’s also a TIAA-CREF bond fund that’s available for investors who are looking to do ESG investing through bonds. So, again, there are a lot of options, both for investors in Schwab Charitable or otherwise.

And, again, those investors who do work with advisors, there are more than 300 funds and ETFs available at Schwab that do qualify as ESG compliant or ESG-friendly fund. So, again, I don’t think choice is an issue right now but is just a question of figuring out what are your personal values? And as Juliette said, are you more E friendly or S or G or all of them in equal ratios? And then going around and finding the fund or the security or the bond that suits your personal values and beliefs.

That’s kind of the approach we take. So, again, we provide a lot of tools and products and let investors either work on it directly or through advisors.

MICHAEL:  We’ve been talking about a lot of the positives around ESG investing, sustainable investing, SRI’s, impact investing. Nitin, there are conversations about the effectiveness of these strategies. What are your thoughts on that?

NITIN:  That’s something we did look at extensively when we were developing our point of view last year or two years ago now. But often I think there’s a misconception that if you’re investing in any of these approaches, you may have to sacrifice some return, because after all, investors invest in markets for achieving financial returns, and giving up returns is never really a favorite of investors.

At the same time, the two other factors that are important are what are the risks of an investment? How does it do in down markets, like, for example, we’ve had in the last three months? And last but not the least is, how much is the cost of that investment, what am I paying on an annual percentage basis of the operating expense ratio of the fund or other fees?

And then, somewhat interestingly, on all those three dimensions, the returns, the risk, and the cost of investing, we found that if you were to divide the whole world of investment into ESG and non-ESG, there’s no real difference in statistically significant terms. So ESG funds of the subset pretty much came out on par with the non-ESG subset, as far as all those three, the returns, the risk, and the cost are concerned. So that was somewhat interesting for us, but that I think just goes to prove that people do need education, and there’s a lot of myth and misconception that we do need to demystify for investors. But, again, the people do not have to give up returns or take on more risk or be in more expensive products through ESG.

MICHAEL: Juliette, you made reference to ESG scores earlier, and we know there’s some conversation around these scores, what they mean, and how they’re used. Would you just take a moment and explain what these scores are and share some of the questions surrounding them?

JULIETTE:  Absolutely. There is a ton of misconception around ESG scores. I think the biggest one of which is that an ESG score will tell you how ESG a company or how sustainable a company is, and that’s not true. An ESG score will tell you how well run a company is from an ESG perspective. 

And one of the reason for the confusion around ESGs scores is that a lot of the big vendors around ESG scores, they don’t have a lot of correlation with each other. So if you think about things like bond ratings, Moody’s and S&P, and all the other rating agencies, the correlation between their ratings, for most of the time, is like 0.99. With ESG scores, it ranges anywhere from .3 to .6, so you can understand why that’s a little bit confusing.


JULIETTE:  And that’s partly because they all have a slightly different methodology in terms of identifying what the material risks are, and even in terms of how they’re rating companies. So, for example, MSCI rates… which is one of the biggest vendors for ESG score, will rate companies within their sectors, so, say, healthcare or financials, or companies against their peers, which is great to use if you understand that, but you get some interesting ratings.

For example, some oil companies or even some ammunitions companies rate very highly, or a tobacco company may rate very highly because they are well run when compared to other tobacco companies. And some other companies in healthcare or sustainability or in the energy transition may rate very poorly with the absolute ESG score because they’re compared within those sectors. And that’s different from the other large vendor, Sustainalytics, that tries to normalize across the different industries. But you also get some very interesting dynamics there, as well.

So you get some interesting dynamics with sustainability. Each sector still has their key material factors, and what that does is, for sectors like healthcare, where you have to think about a lot of different risk, like the availability of the drugs to consumers, the waste management of a company, the efficacy, I mean, the side effects and everything else. So it has a lot of risk, but, obviously, also has a lot of benefits to society. But if you’re taking that as a sector and trying to compare it with a whole other sector like technology that maybe has different level of risk, then you also get some weird things happening there.

So you have to understand what those scores are telling you, what vendor you’re using, and what they’re focusing on to be able to use the scores. So I always say the scores, themselves, they don’t give you a ton of information. You need to dig a little bit deeper. Both vendors I just talked about, I don’t want to get in trouble, they all have very detailed reports that are extremely helpful if you dig a little bit deeper to understand how they got those ratings, which I think is how most of our managers use those, for example.

That’s one of the other reasons I would say ESG is very useful for active management. You can actually go beyond the scores and understand what’s going on with the company and sustainability. And I can’t think of any one manager within that platform that uses scores alone as an assessment of ESG. They all dig deeper and complement that with their own work and analysis.

MICHAEL:  And that’s why it’s great that there are people like yourself and Nitin who are doing this sort of analysis and going beyond just, a superficial look at the ESG scores when you’re thinking about these approaches.


MICHAEL:  So we’re starting to get to the end of our time together, but before we wrap up, any closing thoughts from either of you that you would like to share with our listeners who might be interested in pursuing an ESG or an SRI approach in their investing, or any thoughts about the future of this? Juliette, let’s start with you if that’s okay.

JULIETTE:  Yeah, absolutely. ESG is an interesting space that’s very exciting, I strongly believe that maybe 10 years from now, it would just be investing because thinking about material ESG factors is just good investing, right? A lot of consumers care about how you treat your employees, a lot of consumers care about where their products are coming from, what’s in their products, in a world where we are now with a tight label market, what the company’s focusing on, how their treatment of employees is important to their bottom line.

So these are issues that are not going away. If you think about all the different stakeholders, from the consumers to investors to regulators to technology, that’s where the world is going. There is a lot of noise in between, but the directionality of it is clear to me.

So I would tell the listeners you should be paying attention to it even if you don’t care about ESG issues because that’s where the world is going. And if you do care about ESG issues, there are tons of options out there today. And it’s a little messy, so you need to do your work or find somebody to do the work for you at the moment.

MICHAEL:  Thank you, Juliette. And Nitin, anything additional you want to share?

NITIN:  Certainly. I think as we are seeing more recently a lot of, I think as Julie referred to it, greenwashing, so there’s been a lot of news about some of these players in the industry being scrutinized by regulators and other agencies. And that may sound a little disturbing, but I think it’s actually an integral part of the growth and I think it’s actually great that a lot of different types of stakeholders are paying more attention to it. There’s always some kind of financial shakeup that’s essential. None of these growth paths are really straight lines, so to say. There’s always some twists and turns along the way. And I feel it’s actually probably healthy for this segment of the industry to go through this right now. And Schwab truly believes that… especially for Schwab Charitable donors, they’re already starting to invest with the idea of donating the proceeds of those investments. ESG naturally aligns with that idea very well, because it’s already the money that’s, ready for donations, and ESG just philosophically feels, a better fit for them.

And then there are so many choices available at all asset levels that just lends itself very elegantly. I think that kind of combination of charitable donations with ESG bent, especially when they realize that they don’t have to give up any performance, take on any additional risk, or take on any additional expenses. I think it’s probably a great opportunity for donors to consider this as a very viable option both in the short term and the long term.

MICHAEL:  And with that, Nitin, Juliette, I want to thank you both for your time today. You know, understanding the various options and approaches to investing with an eye towards generating positive social or environmental impact is no easy task, as we discussed, but I think you’ve done a great deal to help our listeners gain some perspective.

NITIN:  Thank you for having us, Michael.

JULIETTE:  Thank you for having us.

MICHAEL:  Thank you for listening. We hope you’ve enjoyed this episode. Please consider leaving us a review on Apple Podcasts or your favorite listening app, as it helps others discover the show. We encourage you to listen to other episodes in this series, as well as other podcasts from SSIR. This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of topics and speakers. For important disclosures and a transcript of this episode, visit


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