Sequence 01
Module 3

The Efficient Impact Frontier

Module Overview

What does ‘optimized’ performance look like? How can I know whether I am leaving impact, financial returns, or both on the table?

The concept of the Efficient Impact Frontier offers a twist on the efficient frontier from Modern Portfolio Theory (MPT). In MPT, an ‘efficient’ portfolio offers the greatest financial return for a given amount of risk and for a given universe of possible investments. A portfolio is ‘inefficient’ if you can get more financial return without increasing risk, or vice versa, by changing the portfolio composition.

This module extends the two-dimensional frontier of financial risk and return to include a third dimension of performance: impact. A portfolio is on the ‘efficient impact frontier’ if it offers the greatest possible level of impact for a given amount of risk-adjusted financial return. This concept helps investors relate investment-level decision-making to portfolio-level impact and financial goals, in order to construct portfolios that optimize both impact and financial performance.

Introduction to the Efficient Impact Frontier

The efficient impact frontier creates a bridge between impact and financial considerations, and between investment-level decision-making and portfolio-level performance. It provides a framework for integrated analysis and decision-making that does not assume or depend on one universal relationship between impact and financial performance (i.e., tradeoff or no tradeoff).

Worksheet - Impact Portfolio Construction Simulation

You can explore the concept of the efficient impact frontier with our impact portfolio construction simulation. This exercise will challenge you to construct a set of portfolios using real-world data that optimize performance for different impact and financial considerations. This simulation has been used by thousands of MBA students in combination with an associated Harvard Business School case study.

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