In order to properly frame this question, we first need a working understanding of a few shared terms. First: what is a market rate of return? Here’s a definition from My Accounting Course (emphasis added by me):

Definition: Market rate, or the going rate, is the rate of interest that is readily accepted by borrowers and lenders based on the risk level of the transaction. In other words, the market rate is the standard interest accepted in an industry for a specific type of transaction.

While this definition uses debt terminology, the same principle applies to equity and all other investment notes. They just have different accepted market rates of interest or return (generally higher than debt). The risk and return concept, however, remains the same.

Second, when we drill into defining market rate, four core terms are used in making a market rate analysis:

  • Interest: What is the investment return?
  • Risk Level: How much risk (i.e., how much of a chance of loss) did you take?
  • Standard Interest: How much interest is standard?
  • Specific Type of Transaction: A similar type of investment.

So notice that even without applying any social capital perspectives or filters, determining a market rate is difficult; thus, determining whether the social capital investments match the market rate return is complicated. Assessing the actual risk is a challenge, as is figuring out which markets to compare (i.e., the S&P 500 versus a bond index fund versus one of the numerous other benchmarks). Compounding these difficulties is the fact that social-capital-minded alternative indexes are relatively new and unknown. Thus, social capital investments are difficult to quantify.

Perhaps the easiest and best example of a comparison that takes social capital into consideration is whether an index fund of public companies that follow ESG (Environmental, Social, and Governance) criteria performs better than the comparative S&P 500 index. On average, the S&P’s total annual return is 9.8%. The Vanguard FTSE Social Index posts a one-year average annual return of 11.27%; the Parnassus Core Equity Fund’s one-year average annual return is 17.21%. Both index funds meet ESG criteria. The MSCI KLD 400 Social Index, which also excludes “sin stocks” (alcohol, tobacco and firearms), currently posts a one-year total return of 10.12%.

There are also examples of social capital investments “winning.” The Ford Foundation, for instance, had an early stake in Tesla, which performed phenomenally well per the stock market return.

Of course, one winner does not make a market-winning portfolio. For every Tesla, there’s a Solyndra. And of course, you have to figure out if your social capital goal was met (which is another topic – and another blog post — altogether).

My general take is that on an individual level, being mission-driven allows for companies to succeed more easily than non-mission-driven companies.  Being mission-focused is a fundamental tenet of entrepreneurialism that allows for a better attack on an issue, attracting better people, and propelling growth. However, entrepreneurs often and unfortunately simply have a mission of making money, which easily eclipses any societal good. Therefore, it’s impossible to quantify if an entrepreneur is mission-driven for societal impact over simply being mission-driven. On more passive tracking indexes, if broad-based and diverse, simple screens may only make a tracking fund slightly better or slightly worse than the overall market average. All in all, there’s no easy answer.

Additional articles on this subject:

New Collaborative Looks to Make Market-Rate Investments with Conservation Impact” from the Conservation Finance Network

What You Need to Know About Investing” from the Global Impact Investing Network

Almost Everything You Know About Impact Investing Is Wrong” from the Stanford Social Innovation Review