I do want to share a cautionary tale about such investing: in the UK, there are tax-efficient investment vehicles called EISes and VCTs, which are designed to encourage investors to put money into somewhat risky early-stage UK businesses (and give big tax breaks as a result).

At one point, there were renewable energy EIS/VCT funds which seemed to give excellent returns – but only because the companies involved were claiming substantial, risk-free government subsidies for renewables schemes ("feed-in tariffs"). Eventually these schemes were scrapped, as were feed-in tariffs.

So an unwise impact investor might have put money into such a scheme, made a nice profit, and thought they were doing social good. In reality, the profits were just money taken from taxpayers (FITs were funded by making energy more expensive for all households), and impact (building inefficient, small-scale solar in a country where solar energy doesn't make much sense[1]) probably pretty minimal.

[1] - Peak energy demand in the UK is in the winter when it's coldest and darkest, so solar is basically useless here. Compare that to California, where peak demand is when people switch on their A/C during the sunniest part of the day.

Thanks for getting the conversation going on this topic, which hasn't received enough systematic attention by EAs. An excellent treatment of this issue is given by Paul Brest here - https://ssir.org/articles/entry/impact_investing . This suggests that the prospects of achieving market rate returns and having social impact are dim. One may be able to have counterfactual impact by accepting below market returns or at the extreme providing a grant to a company. (Open Phil has invested in Impossible Foods, presumably accepting below market returns).

One observation I have is that there is a big step between showing that impact investing might work in some conditions and actually finding good opportunities. It seems like identifying good opportunities would take serious up a lot of serious research time - of the same order we would expect to identify a recommended GW charity. A glance through some impact investing platforms suggests they offer quite shallow analysis of enterprises that look unlikely to be effective. So, I think we should acknowledge that this space is worth exploring but be very sceptical about any particular opportunity, whether that be Wave, World Tree or whatever

Among the most significant confusions in investing is this: when you buy a stock for $10, you give up $10 now in exchange for some variable return in the future. Importantly, the seller gets back $10 and gives up the same variable return in the future. Both parties are happy with this trade (due to different preferences or beliefs about the world).

This symmetry applies to the social impact too. The buyer gets a stock producing social impact. The seller gives up a stock producing social impact. It is unclear whether this transaction has affected the total social impact in the world at all. My understanding is that the section A Rational Take on Investing does not take this into account.

The above paragraph is the typical second-order reasoning in this space, and is a more explicit version of a point kbog made.

• First-order: I claim credit for whatever good/bad things I'm associated with, thus impact investing counts for a lot.

• Second-order: taking counterfactuals into account, impact investing appears to have approximately zero impact.

• The interesting stuff: controlling or launching important startups, and shareholder activism in general, seems like it might do something, and can sometimes be targeted at the most promising cause areas. Plant-based meat alternative companies are the companies that I'm aware of that seem likely to be worth EA investors' attention for this reason. Maybe holding tobacco company shares in order to be able to more easily lobby them might be attractive for EAs focused on global health. Note that these activist approaches are entirely distinct from what most of the impact investing industry is doing.

(quoting from the open thread)

The timber is sold after 10 years, conservative return to the investor is $20k

This kind of investment would be considered high risk - this company only started this program three years ago, and the first trees haven't yet produced profit.

This sounds extremely suspect. Conservative investments do not generate 23% CAGRs, and there are plenty of investors willing to fund credible 10 year projects. Timber was a particularly fashionable asset class for a while, and 'enviromental' investments are extremely fashionable right now.

[This is an opinion and is for information purposes only. It is not intended to be investment advice. You should consult a licensed financial advisor for investment advice. This is not the opinion of my firm. My firm may have positions in the discussed securities. This is not an invitation to buy or sell securities].

If capital markets are efficient and most people aren't impact investors, then there is no benefit to impact investing, as the coal company can get capital from someone else for the market rate as soon as you back out, and the solar company will lose most of its investors unless it offers a competitive rate of return. At the same time, there is no cost to impact investing.

In reality I think things are not always like this, but not only does inefficiency imply that impact investing has an impact, it also implies that you will get a lower financial return.

For most of us, our cause priorities are not directly addressed by publicly traded companies, so I think impact investing falls below the utility/returns frontier set by donations and investments. You can pick a combination of greedy investments and straight donations that is Pareto superior to an impact investment. If renewable energy for instance is one of your top cause priorities, then perhaps it is a different story.

Thanks Naryan for starting this interesting discussion! My own two cents:

-I attended a presentation organized by Valeurs Mobilières Desjardins about two years back on socially responsible investing (SRI). The upshot was that the research on this indicates that SRI investments perform comparably (neither better nor worse) to non-SRI investments in general. Assuming this applies to impact investment, and that the vast majority of EAs will invest part of the money they earn, it seems to me that as long as there are any positive social impacts from SRI and impact investment, these should be the default mode of investment of EAs, all else being equal... If so, this seems well worth discussing.

-I didn’t fully get the distinction you make between SRI and impact investment. For instance, I’m part of the Ethical Investment Group http://www.gie-eig.ca in Montreal. We’ve long been investing in individual companies we think of as having beneficial impact, as well as in community loans, etc (some of which are listed in the links you gave). I always thought of this as ethical or socially responsible investment. Which would you say it is?

Thanks for exploring this topic!

A few relevant links you might find useful, if you were unaware of any of them:

1) There's an EA FB group on the topic, although unfortunately it's quite inactive

2) Hauke Hillebrandt has written and spoken about EAs engagement with impact investing

3) My blog post exploring whether it would be worth EA Funds or another EA group setting up opportunities for smaller donors/investors to get involved in impact investing. I was focusing on clean meat and plant-based meat to reduce animal suffering, but briefly consider other cause areas in the piece. TLDR: there probably aren't good opportunities for doing this at the moment, but if the landscape changes and some areas become more funding constrained, then it could be a really useful intervention.

General thoughts:

I think there are two main issues for EAs with regards to impact investing, if you come at it from a utilitarian perspective + want to maximise good.

1) Is the social impact greater in total for the same amount of "lost money" in many impact investment opportunities? Through impact investing, in theory at least, you will be losing ROI compared to the market rate. This is equivalent to a donation. Could you do more good by donating directly? If so, then EAs don't need to consider impact investing.

2) The practical issues. How do we manage this? As you note, smaller donors/investors can't invest themselves. Could we pool money together through an EA impact investing fund manager?

I explore both ideas in my blog post linked above. If you come at the issue from a non-utilitarian perspective, then you might still value Socially Responsible Investing.

Specific request / suggestion:

I like the look at a particular investment option above. But I'm not following your opinion on how impact investment there might compare to donation to Cool Earth. Since an issue for EAs is the comparison (in social "bang for your buck" terms) between a direct donation to a charity and an impact investment (which will lose you money since it will have a lower ROI than the top of the market investments), it might be helpful to have a detailed model of an individual case study, which covers estimates on impact for the same amount of lost money, and the timescales involved.

Great post!

This is something I've considered quite a bit.

My personal take is that if you can find the right impact investment, it would be much more effective than a non-profit because by the nature of their setup a non-profit can never exhibit exponential growth. I can't find the research but I saw something which showed that non-profit giving has been pretty much exactly x.y% across the board for many years and that pie rarely changes so EA in it's current form seems to be a lot about allocating that fixed amount of charity money to more effective charities which do the most good.

What appeals to me about impact investing is that if you find the right product/service it should be able to not only grow without any future dollars but also scale exponentially after my initial investment. e.g. if I give $50k to a company which produces a meat alternative that supplants animal products and it takes off then theoretically it could grow into a business generating billions of dollars in revenue and subsequently making a huge dent in the reduction of greenhouse gases (fewer cows needed), reduced animal suffering, and depending on your perspective revolving meat consumption a potential for great individual health in the form of reduced cancer, etc.

This is not necessarily a hypothetical because Beyond Meat and Impossible Burger are both growing massively and seem to be having an actual impact in reducing meat consumption (56% of their consumers are meat eaters who just like their food and are looking to reduce their consumption).

Anyways, that's just one example but I think the same could be said for other arenas like solar, lumbering with sustainable practices etc.

In terms of accessing these investments, unfortunately the majority require being an accredited investor but I assume there is a way to create a fund or non-profit which invests exclusively in these opportunities which could then be held to a similar standard as EA charities in terms of evaluating their potential impact.