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Portfolio > Portfolio Construction

Forget Labels: Focus on Client Intentions to Help Create Impact Portfolios

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What’s the difference between funds labeled sustainable, responsible, green, ESG and impact? The label won’t necessarily tell you — and may just create confusion, as ThinkAdvisor has reported.

Rising interest in impact investing has generated a flood of products labeled “impact” by their creators, but these options vary wildly and there are no naming standards. No wonder advisors and investors are struggling to communicate about impact investing.

Standards will emerge, but advisors who want to keep and attract the growing ranks of sustainability-minded investors can’t afford to wait. The best solution right now is to map client goals and available products on the impact spectrum.

Using a simple, common language that distinguishes between values alignment (when assets reflect an investor’s values) and impact contribution (when assets help solve a big world problem), advisors can efficiently create portfolios that meet client goals.

Building a Values-Aligned Portfolio

I’ve found it’s easiest to start with values alignment. For advisors, the first step is determining investor intent: Knowing what the client wants to achieve is as important for impact as it is for asset allocation. Because particulars vary by client, advisors can add a lot of value in portfolio construction.

Values-aligned portfolios typically have these characteristics:

  • Enterprises invested in have a commitment to all stakeholders (customers, employees, suppliers, communities, shareholders, the planet).
  • That commitment is measurable via voluntary reporting (such as an annual ESG report) or a minimum score on an ESG scoring system such as those offered by Sustainalytics or MSCI.
  • The enterprises conduct activities the investor is willing to support, or if not, are best-in-class examples in “dirty” sectors like fossil fuels.

Knowing the client’s intent, you can comb through their existing portfolio to identify investments that don’t fit their criteria, and then create a plan to replace them over time with investments that do. Toniic co-founder Charly Kleissner calls this process “detoxifying the portfolio.” It takes time, but it’s rewarding to see the portfolio shift from investments that can cause harm to investments that avoid harm and even benefit multiple stakeholders.

Moving Toward Impact Contribution

Clients who want their investments to help solve big world problems are aiming for a portfolio that achieves impact contribution. This usually means addressing one or more of the United Nations Sustainable Development Goals, which target measurable improvements across 17 key problem areas. For examples of how impact investors are addressing the SDGs, see this report from Toniic’s T100 project.

The first step toward constructing a portfolio with impact contribution is to identify the client’s investment thesis, or theory of change. Think of this as one or more “if-then” statements about positive impact. For example: “If we help educate girls living in poverty, then we will improve economic outcomes for entire families.” Many investors also have particular interests — clean energy, health, education or affordable housing, for example — that the portfolio can reflect as it moves from values alignment to impact contribution.

The next step is to identify and evaluate potential investments that fit the thesis and investor interests and create a plan to deploy capital.

Investments with impact contribution typically have these characteristics:

  • They align with the client’s investment thesis, or theory of change.
  • They yield measurable social or environmental results that can be attributed to the investment.
  • They create positive net impact (that is, the benefits they contribute are not outweighed by any negative impacts that may also result).

Some values-aligned investments contribute to positive impact, but many don’t. For example, an investment in a socially responsible accounting firm might fit with client values, but it’s not making a direct impact contribution. There’s nothing wrong with accounting — the world needs it — but it does not have direct impact on poverty, education access, climate change or other big problems.

Most impact portfolios contain investments yielding a range of returns, each appropriate to the particular investment and asset class, with the goal of achieving a target risk-return profile for the portfolio as a whole.

Building an impact portfolio is a journey, not a destination: the first step is as valuable as the next. It takes time, and there’s always the potential for deeper impact ahead. Don’t be deterred by the confusing labels. Using the guidelines above, advisors can help clients turn their intentions into actions now.

Adam Bendell is CEO of Toniic, the global action community for impact investors. He builds the global Toniic network of high net worth individuals, family offices and foundations actively investing for deeper positive net impact, and he guides the creation of tools and learning resources. Adam joined Toniic in 2016 after serving as chief innovation officer for FTI Consulting, a global business advisory firm. Prior to that he was an attorney with Gibson, Dunn & Crutcher, where he helped apply technology to the practice of law.


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