How to Transition Your Investment Portfolio Toward Impact

(Illustration by iStock/gud_zyk)

If you are trying to figure out how to transition an investment portfolio towards impact investing in 2019, you are in luck: The practice has gone mainstream, and a wealth of information about it can be found from resources including GIIN, Omidyar Network, Confluence Philanthropy and PRI.

For would-be impact investors who don't want to spend weeks or months wading through the materials, we're here to help. We evaluated dozens of case studies, industry reports, online and offline discussions, and our own experiences to collect the insights from innovators and early adopters.

How deep did we go? We reviewed 46 transition case studies and webinars. Fifty percent of them were produced by foundations ranging from $10 million to $50 billion in assets under management, and 30 percent were provided by investment managers and advisors. The remainder came from pension funds, family offices, and industry organizations, such as TONIIC.

Yet it's also important to know what we don't know. To keep driving the industry forward, we also identified the steps impact investors should take next that could inspire another round of useful case studies.

Let’s begin with the most important lessons about getting ready for an impact portfolio:

1. Market-rate returns are possible for all types of investors. Several foundations and endowments said the most difficult hurdle they had to overcome with their stakeholders was the idea that they had to sacrifice returns to make a real impact. Yet all of the impact investors who sought market-rate returns succeeded in achieving that goal. That said, it won't happen overnight. Depending on your investment strategy and resources, it could take a few weeks to a few years. However, there is no need to re-invent the wheel. If you are thinking of a specific solution for your needs, the odds are that it already exists.

2. Impact investing is still investing. There are no guarantees in traditional investing, nor are there in impact investing. You still have to weigh the risks of any impact investment as critically as you would a traditional investment.

3. Don’t wait for perfect measurement. Many of the endowments and foundations we studied expressed frustration with the lack of comparability and uniformity among existing impact measurement tools. Don't let this hold you back—choose a metric and get on with it! With the adoption of the Impact Management Project and UN Sustainable Development Goals (SDGs) in the past couple of years, there are more widely adopted systems than ever before. Even without them, investors we researched successfully built and tracked an impact portfolio despite a diverse toolset and conflicting methodologies. Furthermore, measurement will only improve as more investors enter the space, providing another reason to get started now.

4. Collaborate and leverage the industry. Throughout our research, one theme remained constant: Transitioning a portfolio to impact requires a wide range of expertise. Good news: There is no need to go it alone. The impact investing industry is highly collaborative, with many firms, investors, and individuals willing to share their skills with new entrants. Partner with people who have been around the block. Some of the largest foundations we studied relied on consultants and advisors to help with transitioning.

5. Be ready for a spike in engagement. Conversations about moving toward impact investing will change routine interactions with boards, investment committees, beneficiaries, trustees, and other stakeholders. Be prepared to get—and keep—all of them behind the transition. That means setting aside more time for interactions and increasing the frequency of meetings. It is also crucial to have the right type and level of resources in place to make full use of this opportunity. 

Kickstarting Change

In his book The Power of Habit, Charles Duhigg argues that if we identify and change our most important habit, it is likely to trigger positive changes in other routines. In that spirit, here are meaningful steps you can take within your organization to kickstart your impact investing journey:

1. Figure out what you own. Start by asking a simple question: What are we invested in? Lay out what you own in simple terms. You might be surprised—as many of the case study subjects were—with what your existing portfolio looks like. You might find that you have highly conflicting exposures—such as investments in fossil fuel companies that outweigh investments in renewable energy—that lead to divestiture or reallocation. You might also discover a lack of transparency and flexibility in your decision-making. And if you do, this might mean that the conversation needs to extend towards better understanding how you currently invest and who you are working with, versus just looking at the portfolio.

2. Put it in writing. No matter how broad or specific, add your intentions to transition to impact investments in official documents, such as the investment policy statement. It will shift your team's focus to a new goal and keep all of your stakeholders on the same path.

3. Make your intentions public to keep you accountable. Many impact investors’ first decision was to sign the DivestInvest pledge. Consider doing the same or making another public announcement of your intentions. It could motivate stakeholders to come up with a plan for making the transition.

4. Leverage your liquid investments. Yes, private market investments make for the most compelling impact investment stories. But the fastest—and still significant in terms of impact—changes are made in the liquid part of a portfolio. It's easy to do, too, because there are so many options of this investment type. You could switch your cash investments to a community bank or a bank with responsible lending practices. Maybe you transition your public equities exposure to values-aligned investments. Or you include green bonds and other positive-impact options in your fixed-income allocations.

Building the Next Generation of Case Studies

Impact investing has made great strides but has a long way to go to reach its full potential. To smarten up the industry's efforts, newcomers and old hands should take these case-study-inspiring steps:

1. Change others, not just yourselves. Impact investors should use their influence with service providers—such as wealth management firms, asset managers, pension funds, or 401(k) providers—to change their practices in ways that spread the concepts of impact investing even further.

2. Elevate more social issues. Most of the case studies we reviewed focused on a small number of impact themes, most notably climate change. We concede that some themes are more investable than others. But to inspire more investors with a diverse range of passions, we need to push the boundaries. We must explore and share experiences about other important areas, including gender, poverty, hunger, health, or others related to the SDGs.

3. Share the journey, not just the results. Impact investors need to talk about more than portfolio returns. They should also explain how they decided that impact investing could go hand in hand with solid financial returns. Results of course matter, but the reasoning behind those results can provide equally powerful insight.

4. Zoom out. Many of the cases we studied focused too closely on the individual or organization instead of the investments or lessons. While it is undoubtedly interesting to learn about specific investors, especially those with compelling and passionate background stories, the reader can get lost in the specificity and feel that these experiences don’t apply to their own portfolios or organizations. To continue mainstreaming impact investing, more cases need to focus on collective experiences and actionable insights.

Are You Ready?

The overwhelming tone of the cases we studied was positive: Investors of all different sizes are today reaping the financial and social rewards of transitioning to impact-aligned portfolios. They're doing so without sacrificing returns or taking on outsized risks. Are you ready to make the shift? Our research emboldens us to say: Yes, you are.

Read more stories by Hummayun Javed & Gabrielle Morgan.