Goals-Based Portfolio Theory

CHAPTER 7Impact Investing

“The negative idea of Unselfishness carries with it the suggestion not primarily of securing good things for others, but of going without them ourselves, as if our abstinence and not their happiness was the important point. I do not think this is the Christian virtue of Love.”

—CS Lewis

A company is asking for an investment from you. Its numbers are incredible—the company projects 65% annualized returns over the next 10 years. What's more, you believe that it can accomplish this. In fact, this is, by your estimate, a conservative projection. One catch: the company employs slave labor in its manufacturing process (overseas, of course).

Clearly, no one would invest in this company (if you find yourself tempted, you should put this book down and read some books on moral philosophy or religion). There is, in fact, no financial return that could justify the enslavement of our fellow humans. Given a marketplace of investors who all turn down even such a lucrative offer, we could say that the cost of capital for this business is infinite. And that is part of the point of impact investing—to change the cost of capital for a business so that other businesses take note and change their behavior to reflect the norms and preferences of their investors. Given an infinite cost of capital, businesses will realize that slave labor is not a financially successful practice and abandon it.

We are all, therefore, impact investors, at least on some level.¹ The conversation ...