Institutional investors have long been skeptical that impact funds can deliver the returns they need to meet their investment objectives. But a group of asset managers is arguing that investing with a social purpose, such as climate change, adds financial value and diversification that mainstream funds can’t offer.

Even so, the group — which calls itself Impact Capital Managers and includes investment firms includes TPG, Bain Capital, Neuberger Berman, and others — is calling for more evidence to convince investors that they don’t have to trade high returns for so-called impact investing, or investing with social, environmental, and other objectives.  “Institutional investors tell us, ‘Show me evidence, don’t just tell me a story about the fund,’” said Maya Chorengel, a senior partner at TPG in its impact group and sector lead for financial services for its impact product, called the Rise Fund.

Chorengel was speaking at a private meeting in Manhattan to discuss the group’s recent report, entitled “Alpha in Impact: How Operating with an Impact Objective Can Add Financial Value to Investors.” “They want to know ‘is this just clever marketing or is this really impact alpha?’”

The Impact Capital Managers group worked with Tideline, a strategic consultant in impact investing, to produce the report, which Tideline says addresses investors’ frequent assumption that impact does not meaningfully contribute to returns and that investing with larger societal goals in mind involves accepting lower returns, rather than actually increasing performance. “We are a social justice organization, but to survive we have to generate a sustainable financial return,” explained Roy Swan, who heads the Ford Foundation’s mission investments team, at the meeting.

Deep Dive: What’s Holding Back Impact Investing]

Swan said impact funds are tapping into different sources of returns and diversification. Swan cited studies, for example, showing that firms with ethnically diverse general partners had the most diverse portfolios as well. But they haven’t caught on with investors. “Firms with ethnically diverse minorities [in leadership] maybe get two percent of VC capital,” he said. Swan explained that with Ford’s and others’ capital, diverse entrepreneurs get to participate in the U.S. and global economy. “We see diversity not just as a morally right thing to do, but we see financial opportunity here.”

In an interview with Institutional Investor, Deval Patrick, head of Bain Capital Double Impact — the private equity firm’s impact investing unit — and former two-term Governor of Massachusetts, said it’s important to be clear about what the firm means by impact, including the types of returns that are targeted.  “For us, it’s a private equity-style return, not a concessionary return,” he said, referring to the practice of some investors to accept lower returns in exchange for greater social benefits. “We are investing in particular parts of the middle and lower middle market where we are convinced we can get a PE-type return and where we can be very impactful.”

Patrick said that the team wasn’t convinced it could do that in affordable housing, for instance. But it has invested in a series of low-cost gyms. “There’s nothing inherently impactful about gyms, but their goal is to invest in areas where there weren’t other alternatives but where there might be high rates of diseases like diabetes.”

TPG’s Chorengel said investors also want to know how the Rise Fund is different from other TPG funds and how the impact objective specifically adds to the fund’s returns. Chorengal said it’s similar to performance attribution, where managers have historically provided detailed information on how they achieved the returns for an investment.  For one thing, Chorengel said, the Rise Fund has access to certain deals that other TPG funds do not.  “We were able to find our way into investment opportunities that our colleagues on the mainstream side had been interested in but hadn’t gotten traction with because the entrepreneurs were worried about mainstream private equity coming in and taking over,” she said. “So we could win opportunities where the entrepreneurs wouldn’t even pick up the phone when other fund managers called.”

The report identified ten drivers of returns that apply specifically to impact investments. For example, impact managers get unique deals by accessing different networks and relationships that traditional funds.  Jennifer Signori, a senior vice president at Neuberger Berman who, among other things, is responsible for leading the development and execution of impact investing strategies across asset classes, wanted Tideline to share aggregate numbers that were collected as part of the study but which were not part of the report. With that data, investors could run their own analysis, she said.

Brian Trelstad, a partner at Bridges Fund Management, said there are ongoing discussions with Wharton and Harvard about building a comprehensive database on impact investments. Still, there simply isn’t a lot of existing data on the pros and cons of impact investing, the managers acknowledged.  Patrick said he often uses a phrase coined by a partner: “Impact investing is the lab where capitalists work to reform capitalism. We are all capitalists, but we recognize that capitalism has done harm along with good,” said Patrick.

Read more at Institutional Investor