Impact investing can be a valuable financial tool for private-market investors seeking to manage risk. New research by Cornell SC Johnson College of Business assistant professor Kelly Posenau and her co-authors indicates that private market impact funds—vehicles that direct capital to companies that generate impact environmental and social benefits—can help investors reduce market risk exposure and diversify portfolios.

While impact funds are typically known for their environmental and social goals, “adding impact to a portfolio may lower market risk exposure,” Posenau said. “And they don’t necessarily require the financial trade-off most people assume.”

Posenau and co-authors HEC Paris associate professor Jessica Jeffers and Yale School of Management doctoral student Tianshu Lyu recently published their findings, “The Risk and Return of Impact Investing Funds,” in the Journal of Financial Economics.

According to the study, impact investing funds have lower returns than public equity markets but perform comparably to non-impact private-market funds on a risk-adjusted basis. Impact funds, as a result, offer lower-risk investment opportunities at similar costs as non-impact funds, they found, making impact funds an attractive option for private-market investors with social and environmental goals in venture capital, growth equity, or private equity generally.

Read more about impact investing on the Cornell SC Johnson College of Business website.

Alli Romano is a freelancer for the Cornell SC Johnson College of Business.