Impact-Financial IntegrationFor investors to play an even greater role in solving social and environmental problems, impact management must leave its silo and integrate with financial management.
Introduction
After years of framework development, metric definition, and data collection, many investors are increasingly able to anticipate, measure, and manage the social and environmental results of their investments.
But for investors to play an even greater role in solving social and environmental problems, impact management must leave its silo and integrate with financial management.
The challenge is that financial and impact management methodologies are not designed to be interoperable. Impact specialists at investment funds typically have their own teams with their own vernacular, frameworks, and datasets, all of which exist in varying degrees of isolation from their financial counterparts.
Siloed approaches leave impact, money, or both on the table. Yet investors who wish to integrate financial, social and environmental considerations are faced with a custom job.
To address this challenge, Impact Frontiers works with investors to pioneer new methods to integrate impact management with financial management, and share these methods with the field at large.
The Promise of Impact-Financial Integration
Many investors that seek to create positive impact conduct impact analysis primarily at the pre-investment or screening stage. They apply a negative impact screen (filtering out companies with socially or environmentally harmful practices) and a positive impact screen (allowing in only companies that pass a threshold of positive impact). Once prospective investments have passed both impact screens, investors typically make investment decisions and construct portfolios purely based on financial considerations.
Beyond screening, few investors or lenders actively optimize both impact and financial performance simultaneously. The methods described here enable investors to go further by actively optimizing for both impact and financial performance in portfolio construction. Additionally, impact-financial integration enables investors to communicate all dimensions of their goals and performance internally and externally with greater clarity and transparency.
Asset owners can use methods of impact-financial integration to become more discerning and informed consumers of investors’ impact and financial performance reports, and to allocate capital to those managers that create impact most efficiently and effectively while meeting asset owners’ financial goals.
Impact-financial integration is useful both to investors seeking market-rate financial returns, and to investors able to accept less. Investors seeking market rates of financial return can use the approach to increase their positive impact on people and planet while furthering their financial goals. Investors willing to accept a financial concession can use integrated impact and financial data to target those financial concessions to where needs are greatest, and to where capital can be used most productively to address pressing social and environmental issues.
“Many investors are not distinguishing between different levels of expected positive impact – it’s, “I’m going to look for companies in a certain space”, but without the tools or criteria to easily determine the highest and best use of impact capital.”
Katya Levitan-Reiner, Propel
Collaborating Across the Returns Continuum
Impact Frontiers brings together investors from across the continuum of financial returns described by Omidyar Network, ranging from grants on one end to excess risk-adjusted financial returns (i.e., ‘alpha’) on the other.
Many investors seek market-rate risk-adjusted financial returns, while others are able to accept less when there is potential for especially high impact. Both sets of investors find impact-financial integration useful in setting and achieving integrated impact and financial goals. In their own words:
“Our investors have given us a financial mandate that includes fiduciary duty, but also an impact mandate. This is our way of implementing both of those mandates simultaneously.”
Hannah Schiff, Nuveen
“We are trying to ‘buy’ outsized impact by taking reduced financial returns across the portfolio. We needed a framework for doing so and for demonstrating that we are achieving that goal.”
