4 Steps to Integrate Impact and Financial Data Within Your Portfolio

4 Steps to Integrate Impact and Financial Data Within Your Portfolio

November 18, 2020

5 min read

Only 9% of family offices interviewed in a recent 2020 UBS survey indicated that they currently employ impact investing practices, while 14% stated that they plan to incorporate the social investment approach into their investment strategies in the next five years.[1] This is in stark contrast to exclusion-based investments which currently comprise the highest proportion of family office portfolio management strategies at 30%.[2]

One explanation for the low rate of adoption of impact investing stems from the difficulty in measuring impact, in fact, 66% of respondents indicated impact measurement as their biggest challenge.[3] In addition, two thirds of the family offices in Asia that AVPN has surveyed indicated that there is no formally designated staff member who oversees impact management in their organisation, despite an interest in impact management.

When we asked Mike McCreless, Head of Investor Collaboration at the Impact Management Project (IMP) and Katya Levitan-Reiner, Chief Operating Officer at single-donor investment firm Propel Capital how they would address these barriers, they offered four key steps to help investors to meaningfully integrate impact and financial data into investment decisions and portfolio management.

Step 1: Create an Impact Rating

To holistically assess their impact performance, investors can create a multi-dimensional rating that accounts for various impact dimensions across their portfolio such as scale of impact, depth of impact and impact risks. However, there is no standardised approach in designing these impact ratings. Instead, the onus lies on the investors to discuss and define appropriate criteria for their own use.

Depending on the investors’ impact priorities, different weights can be assigned to criteria, such as the number of people impacted and the extent to which these individuals have benefitted. Investors have autonomy in deciding how the weights should be distributed across multiple dimensions. For instance, Propel Capital’s custom impact rating comprises both investor contribution and enterprise impact; a matrix that is well-aligned with their focus on using capital creatively and being flexible to their partners’ needs.

Whatever criteria and weightings the investor chooses to include, they can use the impact rating as a consolidated measure of the attractiveness of prospective and current investments from an impact perspective.

Step 2: Select a Financial Valuation Metric

For the majority of investors, financial valuation metrics are a much more familiar field. As a counterpart to impact rating, the financial valuation metric informs investors of transactions that offer more or less risk-adjusted returns. Investors often use different metrics, such as net present value and internal rate of return, for different asset classes. For instance, Propel Capital compares the expected rate of return from each investment with relevant benchmarks from the respective asset classes, thereby obtaining an estimate of the financial concession value.

By aligning their financial valuation metrics with their impact ratings, investors are then able to evaluate their investment portfolio from both perspectives – impact and financial.

Step 3: Determine Implications for Future Investment

After undertaking the first two steps, most investors question how they can meaningfully visualise and read their  integrated impact and financial valuation metrics easily in practice. In response, the IMP offers one possible approach: to create a scatter plot that joins the expected impact rating on the horizontal axis with the expected financial return on the vertical axis.

From the scatter plot, investors are then able to pinpoint investments that perform relatively better in either domains or both. Subsequently, investments that score low on both impact and financial returns are often phased out of the portfolio in favour of other investments. Additionally, the scatter plot provides a structured framework for investors to assess their impact investments, instead of relying on their intuition. This sentiment is also echoed by Propel Capital, who emphasises increased ability to identify investments that truly support their organisational goals as a result of creating a scatter plot that integrates all aspects – financial and non-financial – of their investments’ performance.

Another benefit of integrating impact and financial indicators is that investors are quickly able to assess whether key performance indicators remain within an acceptable range on a financial as well as impact level. This is a crucial basis to inform and ultimately guide long-term portfolio performance.

Step 4: Measure, Manage and Communicate Integrated Performance of Portfolio Investments

Once information on integrated performance is obtained, investors are highly encouraged to dedicate time towards managing and communicating their impact and financial return goals. In doing so, significant dividends can be reaped, as portfolio efficiency increases when more attractive blended opportunities are prioritised over less attractive ones.

Importantly, by measuring the integrated performance of their portfolio investments, investors are able to regularly re-score their portfolio, hence optimising their investments over time and in response to changes in the economic environment or their investment strategy.

Take the first steps towards impact-financial integration  

These findings have been summarised from the AVPN closed-door convening on “Integrating Impact and Financial Returns Across Your Portfolio” for family office members. It brought together about 20 participants from across Asia – all of whom are seeking to incorporate an impact management framework in their portfolio investments.

To explore further resources, the IMP Impact Frontiers’ Handbook offers tools and techniques that inform the process of impact-financial integration.

For investors who are ready to embark on their impact investing journey, the AVPN’s Impact Investing Fellowship programme is now open for applications. More information can be found here.

[1] UBS Global Family Office Report 2020

[2] Ibid, Page 24

[3] Ibid, Page 26

About Author
Loraine Choo
Loraine Choo Intern, Knowledge & Insights AVPN

Loraine is an intern with the Knowledge Centre at AVPN.

As a Master of Public Policy student at the University of Oxford, she feels strongly about empowering and elevating the social sector, in order to amplify their impact. Besides designing better poli

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