Understanding and Applying Impact Investing in Investment Portfolio Management

Impact investing offers donors the possibility of aligning investments with philanthropic values while realizing financial returns from existing philanthropic investments. Donors may use impact investing as a strategy to revitalize old investments that they already support with this innovative investment strategy.

Integrating impact into an existing portfolio may present unique challenges; therefore, taking an effective and strategic approach when adding impact into one is essential.

Investing for Impact

Impact investment can help your portfolio reflect your values more closely, by changing cash investments to socially responsible options or reallocating public equity and fixed income allocations to align more closely with your values. Or you could take a more targeted approach with venture capital or real estate assets to support social entrepreneurs or address specific sustainability challenges like building clean energy infrastructure.

Consider how you want to define and measure your impact, such as desired timescale for social change and financial return, before finding suitable investment vehicles to help achieve those results.

Step one in impact investing involves reviewing your current systems and making adjustments that reflect your desired impact investing approach. For instance, creating an investment policy statement and formalizing decision-making parameters could be beneficial; alternatively you could start by developing one overarching goal that will inform all your investments before choosing suitable investment vehicles (as Heron has done).

Asset Allocation

An effective impact investing strategy requires foundations to make changes to their systems, so taking the time to evaluate these will help ensure that investments and reports match up with your intended strategy. See Resources section for a selection of databases which could prove invaluable during this work.

No matter your level of engagement, impact investing will require building consensus within your portfolios. Consider how impact investments could alter interactions among board members, investment committee members, beneficiaries, advisors and advisors so as to plan accordingly.

Foundations and endowments that successfully pursue impact investments reported a range of strategies to gain stakeholder buy-in. One key step was educating stakeholders about market-rate returns being possible; this helped dispel myths regarding impact investing’s return potential and reduce misconceptions. Furthermore, timely, clear and complete impact information must be provided so investors can make informed decisions.

Risk Management

Implementing impact investments requires the same level of due diligence. Working alongside your financial advisor, you can consider opportunities that align with your goals and values.

Next, investors need to establish one overarching goal or theme that will guide their investment thesis. For instance, an investor could invest in companies dedicated to solving particular sustainability challenges or addressing specific global or local issues.

As one example, investing in microfinance organizations that lend capital to small businesses worldwide could be beneficial. Such organizations frequently accept charitable contributions that they convert into equity investments or loans for social enterprises – giving investors the chance to put their funds to good use globally while measuring impact against 193 nations’ Sustainable Development Goals (SDGs), an internationally agreed upon set of 15-year goals that offer an efficient framework for meeting impact goals.

Portfolio Design

No matter if you are seeking to invest in companies that promote social values through corporate social responsibility or solving ESG challenges from gender or climate perspectives, we can assist with finding an approach that matches both your risk tolerance and goals. We will assess systems to make sure they align well with impact intentions; additionally you’ll find links in the appendix that can assist.

Matt Christensen, WG’97, global head of sustainable and impact investing for Allianz Global Investors, offered advice during a TIPC webinar to students about topics ranging from impact metrics to intentionality. His guidance provided students with an introduction to the considerations that investors must weigh when building impact portfolios – building upon concepts introduced previously in sections on purpose and incorporation of impact into due diligence/management; drawing resources from theory of change section for specific recommendations tailored towards asset classes/regions/themes exposures.