M-RCBG Associate Working Paper No. 172

Impact in Public Equities

Davide Veronese


Executive Summary

Over the last few years, some mutual funds have launched Impact investing vehicles in public equity markets. Impact investing currently happens in private markets for its most part, for a total value of $715 billion in 2020. Public equity markets can help scaling up Impact investing by virtue of their size (excess of $70 trillion). They also provide private impact investors with additional exit options.

We consider Impact strategies in public equities and assess to what extent they differ from existing sustainable funds and mutual funds in general. In the process, we discover gaps in the market that Impact funds are uniquely positioned to address. Leveraging quantitative analyses, expert interviews and a proprietary Impact Firm List developed at Harvard Business School, we find that:

• Funds that align their investment thesis to advancing the UN Sustainable Development Goals distinguish themselves for their portfolio differentiation (50% less common stocks) and long holding periods of up to 4 years.

• There is a gap in available sources of funding for small-cap Impact firms that go public. Moreover, existing sustainable funds show limited participation in initial public offerings.

To maximize access to capital for impact firms, we recommend that mutual funds further develop their public market Impact strategies by:

1. Focusing sourcing and coverage efforts on Impact firms with a market cap under~$530 million. In going public, these firms face barriers in accessing capital from existing sustainable investors.

2. Promoting portfolio differentiation and long holding periods as distinguishing factors that separate Impact from funds that market themselves as pursuing impact.

3. Engaging with market regulators and impact-oriented SPAC sponsors to promote SPAC legal structures that reward long-term holders.

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