Impact Financial Integration | Exploring the Relationships Between Impact & Financial PerformanceInvestors analyze their portfolio data to explore the relationships between impact and financial performance for their specific investment strategy, context, and goals.
Introduction
Investors can integrate perspectives on the impact and financial performance of their portfolios by creating a scatterplot with investments’ expected impact ratings on the horizontal axis and investments’ expected risk-adjusted financial return metric on the vertical axis.
These scatterplots provide a way for investors to quantify and test their intuitions about the relationships between impact and financial performance in their own portfolios.
Our work with investors has shown that there is no one universal relationship between impact and financial performance. Investors in Impact Frontiers cohorts have identified positive relationships between expected impact and financial return in some contexts, negative relationships in others, and in some cases no relationship at all. These correlations differ from one investor to the next, and are driven by differences in individual investors’ contexts, goals, and strategies.
The larger point is that the relationships between social and environmental impact and financial risk and return can be analyzed empirically and managed proactively by diverse investors. This analysis in turn can improve investors’ decision-making with regards to their financial and impact goals.
Case Study
Bridges Fund Management found a positive correlation between the impact scores and financial returns of its investments.
Integrated Impact-Financial Portfolio Scatterplot: Bridges Fund Management, Property Fund
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Learn more about relationships between impact and financial performance at Bridges Fund Management
The chart above plots the average impact score of the individual investments within one of Bridges’ property funds versus their forecast IRR; the size of the bubbles reflects the amount of money invested in each one to date. It shows a clear trend-line from bottom left to top right, demonstrating that for these assets, there is a positive correlation between commercial success and impact performance.
“Integration between financial and impact performance has enabled us to have richer conversations with both external and internal stakeholders. Displaying financial alongside impact metrics resonates strongly with investors and has allowed us to compare our different strategies in terms of impact and financial performance. During portfolio reviews, this also help us to monitor impact and financial returns at an asset and portfolio- level. We are now using this as a paradigm to help us screen investments during the origination and diligence process.”
Ivan Rodriguez, Bridges Fund Management
Findings from the First Impact Frontiers Cohort
Investors in the first Impact Frontiers cohort from 2018 to 2020 aggregated and compared their portfolio scatterplots to identify trends across their portfolios.
Though preliminary, this cross-portfolio comparison surfaced intriguing hints of the kind of findings that might emerge from analysis of larger datasets in the future. For instance:
- Some investors seem to face a tradeoff between impact and risk-adjusted financial return, while others do not. Specifically, two investors in the first Impact Frontiers cohort found positive relationships between the impact ratings and the expected risk-adjusted financial returns of their investments; four found inverse relationships; two found no relationship; and three had insufficient sample size to determine a trend.
- Investors found that different dimensions of impact have different relationships with financial performance. For example, one investor found that scale of impact (e.g., number of people reached) was positively correlated with the profitability of their loans, but the poverty level of the population reached was inversely correlated.
- In comparing their analyses, investors found that a given dimension of impact may have a different relationship with profitability for different investors. For instance, one investor found that greater investor contribution was associated with lower loan profitability, whereas another found the opposite to be true.
- Some dimensions of impact seemed to have little relationship with profitability either way
Example portfolio scatterplot for a non-profit loan fund showing a tradeoff between impact and financial performance:
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Example portfolio scatterplot for a non-profit loan fund showing no tradeoff between impact and financial performance:
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“We have always thought of impact and financial return as not correlated. They are two separate components and we want to be positive on both. If you had asked us a few years ago, we wouldn’t have seen much value in putting them together. Now that we have implemented our Impact Scorecard and shown our team all of the robust analyses we can do with the data – what the relationships between impact and financial return might mean for our portfolio and operational efficiency, what different deals look like compared to each other, what different parts of the portfolio look like – now folks are starting to see the benefit of this analysis and adopting a portfolio-wide approach.”
